Mutual fund houses have asked capital market regulator Securities and Exchange Board of India to help soften the impact of a possible increase in policy rates by the Reserve Bank of India (RBI) today. Amid fears of hardening interest rates in the money market, funds have asked SEBI to delay the implementation of the more stringent rules for valuation of securities.
The new rules are slated to come into effect from August. Since higher interest rates cause bond prices to fall, the new valuation rules will bring down the net asset value of many schemes, and make big investors nervous, says a report in The Economic Times today.
According to the new valuation norms, all money market and debt instruments with residual maturity of 90 days and above will have to be mark-to-market while computing net asset value (NAV). So a dip in the traded price of instruments of 90 days and above will immediately result in lower NAVs.
On Monday, a day before RBI's monetary policy, industry lobby Association of Mutual Funds of India (AMFI) told SEBI to push back the deadline for compliance of valuation guidelines to September. ''Funds are trying to buy time.
They are talking about the tight liquidity situation in the market... And, they are anxious that RBI's policy prescriptions to battle inflation can lead to further hardening of rates,'' a person familiar with the communication to SEBI told The Economic Times. However, the market regulator is yet to spell out its stand.
The development indicates that many MFs, particularly those that are aggressive on debt schemes, are holding substantial amounts of papers that will mature in 90 days or more. While these securities generate higher returns than those below 90-day maturity, they are more volatile as volatility typically increases with duration.