In order to protect investors from credit risks arising out of defaults by borrowers, the Securities and Exchange Board of India (SEBI) on Thursday rigidified investment norms for liquid mutual funds. Liquid funds are debt mutual funds that can invest in securities up to a maturity of 91 days.
The market regulator has resolved that the liquid funds can invest a maximum of 20% of its assets in a single sector. Currently, the cap of 25% is permissible. Further, the liquid fund is required to keep aside at least one-fifth of their assets in cash equivalents to meet the pressure of sudden redemption, if any.
“Mutual funds investment is different from bank lending and it needs to have elements of safety as well as investment,” Sebi chairman Ajay Tyagi told reporters after a meeting of the regulator’s board.
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The changes are based on recommendations made by the mutual fund advisory committee. The committee was constituted by SEBI to limit liquid fund exposure to a single sector. The sectoral cap has to be complied with from September 2020.
The attempt has been made to further regulate the non-banking finance companies (NBFCs) catering to the housing sector in the light of the liquidity crisis that is engulfing the Indian banking Industry.
Mutual funds still have a Rs 3.12 trillion wide exposure to NBFCs and housing finance companies. This step is considered noteworthy as it is expected to have a significant impact on the Rs 25.93 trillion mutual fund industry in India.