Sebi introduces credit risk based investment limit for actively managed Mutual Funds in debt instrument

Capital markets regulator Sebi on Tuesday came out with a new framework which will put a cap on investment made by actively managed mutual fund schemes in a single company's debt instrument.

At present, such caps are already in place for passive funds such as Exchange Traded Funds (ETFs) and index funds in a bid to effectively manage the risk associated with such investments.

"In order to avoid inconsistency in investment by mutual funds in debt instruments of an issuer, irrespective of the scheme being actively or passively managed, it has been decided to introduce a similar credit rating based single issuer limit for actively managed mutual fund schemes," the Securities and Exchange Board of India (Sebi) said in a circular.

Under this, a mutual fund scheme will not invest more than 10 per cent of its Net Asset Value (NAV) in debt instruments and money market securities rated AAA by a Credit Rating Agency (CRA).
The single issuer limit on such securities rated AA is set at 8 per cent, while the same is 6 per cent and below for A-rated securities.

The investment limits may be extended by up to 2 per cent of the NAV of the scheme with prior approval of the Board of Trustees and Board of Directors of the Asset Management Company (AMC), subject to compliance with the overall 12 per cent limit.

The long-term rating of issuers would be considered for the money market instruments. However, if there is no long-term rating available for the same issuer, then based on the credit rating mapping of

CRAs between short-term and long-term ratings, the most conservative long-term rating would be taken for a given short-term rating.

Exposure to government money market instruments such as TREPS (Tri-Party Repo) on government securities and Treasury-bills would be treated as exposure to government securities.

The new framework would be applicable for all the new schemes to be launched with effect from Tuesday and "existing schemes shall be grandfathered from these guidelines till the maturity of the underlying debt and money market securities".