However, an analysis of February 2021 MF portfolios shows that on an overall basis, no asset management company holds more than 10 per cent of its assets in these bonds.
Sebi last week capped investments by a mutual fund house under all its schemes in bonds with special features (primarily AT1 and AT2) to not more than 10 per cent from one issuer. It also specifies that no MF scheme can hold more than 10 per cent of its net asset value (NAV) of its debt portfolio in such bonds, and not more than 5 per cent of the NAV of the debt portfolio should be due to such bonds from one issuer.
In case a scheme holds more than the mandated perpetual bonds, grandfathering is permitted by the regulator to ensure that there is no unnecessary market disruption. Grandfathering simply means they do not need to trim the exposure but cannot buy any new bonds until it comes below the limit.
“The regulator’s move to ‘grandfather’ limits previously held is a positive move. In the medium to long term, with the restrictions in place, it could reduce appetite among MFs for these securities, thus limiting the risk for investors,” said Piyush Gupta, Director, CRISIL Funds Research.
“This is also prudent given the advent of hordes of individual investors into debt funds. They may not have the ability to understand MF portfolios and gauge risk, especially in such types of bonds. We saw how they were caught unaware by the recent write-offs.”
Industry body AMFI also said it fully supports the capital markets regulator Sebi’s new rule, which puts a cap on mutual fund exposure to perpetual bonds. The industry body recognises that the risk profile of such instruments is higher than regular bonds.
However, the Finance Ministry has ‘requested’ the market regulator to rescind the directive as it fears mutual funds will rush to sell these bonds, creating a squeeze. This will also create difficulty for banks to raise capital as mutual funds are major buyers of perpetual bonds.
Many analysts, including those at Crisil, said the move is a risk mitigation measure to reduce portfolio risk in debt MF portfolios. It comes after write-offs hit investors in such bonds issued by two banks in the past year.
Category-wise, the Crisil analysis also finds that the banking and PSU fund category has the highest number of schemes (7) exceeding the 10 per cent cap in such securities. It is followed by the credit risk fund (5), medium duration fund (4), medium to long duration funds (4), and dynamic bond fund (3) categories among others.
