Fund houses should build buffer, says SEBI

‘Stress scenario requires cushioning’

The Securities and Exchange Board of India (SEBI) has suggested that asset management companies (AMCs) should keep a buffer of liquidity, especially for overnight funds and liquid funds, to deal with stress situations.

Speaking at a mutual fund conference, SEBI whole-time member G. Mahalingam said that while the regulator had nudged the industry to maintain a minimum buffer, fund houses should gauge the liquidity pressure in a stress situation and build a buffer across maturities.

“What I would wish is that the industry itself is going to operate on a cycle where it actually is able to gauge what is going to be the liquidity demands on stress scenario, and it is able to build up the liquidity buffer by building up a ladder of liquidity maturities,” Mr. Mahalingam said at the CII Mutual Fund Summit.

In September 2019, the capital markets watchdog had made it mandatory for liquid funds to invest 20% in liquid assets.

The SEBI member also highlighted the nature of credit funds and said that investors needed to be told that there was an inherent risk involved in the product.

“I think it is the duty of the industry and the distributors to bring forth clearly this risk into perspective so that the retail investor does take a calculated call,” Mr. Mahalingam said.

Mr. Mahalingam, who was earlier with the Reserve Bank of India (RBI), also made it clear that the capital markets regulator did not prefer fund houses to invest in structured products.

“It is better for the industry to keep a distance away from structured obligations, which really don’t make things very clear,” he said.

“I think it is for the industry to take a clear call on what kind of investment products that they would get in, which would actually give them a reasonable return, a good liquidity, and at the same time as safe risk proposition,” he added.

On a different note, he said that fund houses who are an important category of institutional investors should play a more proactive role in terms of enhancing the corporate governance levels in companies where they held stake.

He highlighted that mutual funds abstained on about 12% of the company resolutions and said that over a period of time this number should be brought down as much as possible.

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