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Here, Arjun Parthasarathy of www.investorsareidiots.com, a financial website for investors, provides an analysis of the recent SEBI ruling.
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SEBI has changed the mark to market norms for liquid funds. Liquid funds have to mark to market all securities that are traded and if some securities are not traded and have a residual maturity of 60 days and below they can be amortized provided the rate at which the security is amortized is reflective of the market.
The SEBI order is approved by the SEBI board but is yet to be implemented. Once implemented, all liquid funds will be fully marked to market and investors will see daily fluctuations in the value of the schemes.
The new SEBI rule is a change from the old one not only in terms of the 90-day mark to market cut off but also in terms of the valuation of all securities in the liquid schemes.
The earlier rule did not require liquid funds to mark to market all traded securities, it required funds to mark to market only securities that were listed and traded.
The 90 day maturity rule was for securities that were not listed and traded and these securities were allowed to be amortized at cost.
Certificate of deposits (CDs) and commercial papers (CPs) were not listed and traded and hence were amortized at cost while treasury bills and non convertible debentures (NCDs) were listed and traded and had to be marked to market.
If the new rule is implemented, any paper that has maturity of over 60 days have to be valued. The valuation is done as per a matrix given by CRISIL and ICRA.
Securities that have maturity of less than 60 days that have not been traded need not be valued as per the valuation matrix.
However, given that CDs and CPs are to be listed on the stock exchange and are already seeing all trades reported on the FIMMDA reporting platform, (FIMMDA is the self regulatory fixed income market body) all securities will be marked to market.
Even if a CD or CP with less than 60 days maturity is not traded, other papers of its kind will be traded and liquid funds will have to give correct market valuation to non traded securities as well.
What it means for investors?
Investors who invest in liquid funds with a very short investment horizon of less than 15 days will see returns fluctuate and may not get their desired return and returns can even be negative.
Investors with a longer term investment horizon will see returns coming in positive but will not be assured of returns prevailing at the time they entered the funds.
Hence investors in liquid funds will have to lengthen the horizon or investments and will also have to watch out for sudden spike in short term money market rates.
What it means for liquid schemes?
Liquid schemes will see corporate money becoming opportunistic. The fund corpus will see wide fluctuations, as corporates will come in droves when rates go down and they will go out in droves when rates go up.
Fund managers will cut maturities to as low as 20 to 30 days in the face of volatility of money and this will impact returns for all investors.