Here's Why The Capital Market Regulator May Alter The Mutual Fund Categorization Norms For Debt Mutual Funds - Outside View by PersonalFN

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Here's Why The Capital Market Regulator May Alter The Mutual Fund Categorization Norms For Debt Mutual Funds
Jun 25, 2019

The Capital Market Regulator released mutual fund categorisation norms in October 2017 to improve the standardisation of mutual fund product offerings. It might not have imagined that it would have to overhaul the new categorisation norms within two years.

Courtesy to the reckless credit assessment practices that fund managers of debt funds follow nowadays, the market regulator is pondering on making the existing categorisation norms stricter.

The present categorisation of debt funds is based primarily on the maturity profile of the schemes. And except for credit risk funds and corporate bond funds, the existing guidelines don't prescribe any credit rating profile for other scheme categories.

The general notion has been that schemes with shorter maturities are less risky. But the recent instances of debt fiascos have severely affected the performance of schemes with shorter maturities as well.

After all, the Net Asset Values (NAVs) of liquid and short duration funds have fallen overnight, much like those of equity funds.

According to media reports, the capital market regulator may specify acceptable credit exposure limits for each category now.

In the recent past, the mutual fund houses have been financing distressed companies, without demanding adequate securities, and perhaps without undertaking a strict credit analysis.


When mutual funds received huge inflows in debt schemes post demonetisation, they probably took them for granted. This is when they began to help companies refinance/rollover debts.

As the liquidity crunch in the system deepened and started impacting NBFCs and mutual funds, promoters of distressed companies struggled even to meet their short-term debt obligations, thereby, throwing even short-term debt funds in a complete disarray.

Will these potential changes make debt funds safer?

We have reiterated this-debt funds aren't risk free. The intent of market regulator is aimed at protecting investors' interest. However, the suggested changes may not make much difference to the existing situation, beyond making debt fund offerings more transparent.

In simple words, informed investors will find it easy to avoid funds betting on low-rated papers in search of higher yields. However, this won't offer a surefire solution to investors.

If the credit quality of papers already held in the portfolio deteriorates, the fund managers will have limited options to salvage the investors' capital. It's noteworthy that the debt market volume for non-government securities in the secondary market compared to the volume of securities held by mutual funds is extremely low.

This makes debt holdings illiquid in crisis times.

Under such circumstances, the question of whether or not mutual funds improve their risk evaluation processes is moot.

Here's a caution...

The present liquidity crunch doesn't seem to be a systemic problem and the former RBI Governor, Dr. Y. V. Reddy has warned against the attempts of some industry players who want to present the on-going problem as the industry-level crisis.

In reality, the overambitious promoters who chased growth excessively during advantageous times and overconfident fund managers who had lent money (as if they were bankers) are equally responsible for the present situation in debt markets.

No categorisation would help unless mutual funds stop relying excessively on the credit ratings assigned by independent credit rating agencies.

We, at PersonalFN, have been warning our investors and readers against investing in any debt fund schemes that has invested in troubled companies.

Some responsible media houses have been vehemently writing about the Auditor-Promoter nexus. The unfolding IL&FS story is unmasking the false safety of debt funds. We have caught credit rating agencies napping while some so-called top-rated companies were crumbling under pressure, haven't we?

All these factors point at the difficulties involved in credit evaluation. Gullible investors pushed into debt funds by intermediaries (distributors/advisers), who presented debt funds as an alternative to fixed deposits, have been the biggest losers.

What investors shall do?

In the wake of the diminishing credit quality lately, fund managers of responsible fund houses might have already started taking corrective measures. This includes paring exposure to low-rated papers, not relying excessively on independent credit agencies, and realigning their portfolios keeping in mind the scheme's defined objectives, among other things.

You should invest only in debt schemes offered by mutual fund houses that follow robust investment processes and have adequate risk management systems in place.

Moreover, if you are a conservative investor, restrict your investments to schemes investing only in high-quality papers. You should consider your financial goals, risk appetite, and time horizon before investing in any debt-oriented schemes and adhere to personalised asset allocation.

Editor's Note: Looking to add winning and the best mutual fund schemes to your investment portfolio?

Subscribe to PersonalFN's unbiased premium research service, FundSelect.

Our fund recommendations tend to beat the market by a significant margin over long time-horizons.

FundSelect has beaten the market by over 70% in the last decade.

Each fund recommended under FundSelect goes through our stringent process, where they are assessed and selected on both quantitative as well as qualitative parameters.

With FundSelect, you get access to high quality and reliable funds picked by our research team using their comprehensive S.M.A.R.T. score fund selection matrix.

S - Systems and Processes

M - Market Cycle Performance

A - Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

Every month, PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

Our aim is to assist you in creating the ultimate portfolio that has the potential to top the market.

If you are serious about investing in rewarding mutual fund schemes, subscribe to PersonalFN's flagship mutual fund research service FundSelect today!

Author: PersonalFN Content & Research Team

This article first appeared on Certified Financial Guardian.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Yellow Ad


A One Stock Gift in 1990 Turns into Rs 130 Crores

In 2017, Ravi made headlines by calling a leading business news channel with a surprising announcement - his grandfather had left him 20,000 shares of only one stock.

And on the day of his call - these shares were worth Rs 130 crore.

Can you guess which is this company?

It's MRF.

Ravi's story is one of the amazing stories of becoming Crorepati from a single stock.

But the question is, how to find that one stock with crorepati potential?

To find the answer to this million-dollar question, join our 'One Stock Crorepati' MEGA summit on 30th June, where we will reveal details of what we call a potential 'crorepati' stock...

Learn more

Equitymaster requests your view! Post a comment on "Here's Why The Capital Market Regulator May Alter The Mutual Fund Categorization Norms For Debt Mutual Funds". Click here!

5 Responses to "Here's Why The Capital Market Regulator May Alter The Mutual Fund Categorization Norms For Debt Mutual Funds"

P.Durga Prasad

Dec 10, 2020

Please send electric vehicle stock


Kuldip Singh

Jul 6, 2019

Only one

Like (1)


Jul 5, 2019

Pls send list of recommended stocks,I just subscribed,,this many msgs...not able to find recommended stocks...

Like (1)

Sirjiwan kumar Sharma

Jun 26, 2019

Kindly send only the list of recommended shares

Like (6)


Jun 25, 2019

too many messages outcome nothing

Like (9)
Equitymaster requests your view! Post a comment on "Here's Why The Capital Market Regulator May Alter The Mutual Fund Categorization Norms For Debt Mutual Funds". Click here!

More Views on News

5 Penny Stocks with Good Dividend Yields (Views On News)

Jun 25, 2022

These penny stocks are helping investors get stable returns in a volatile market.

Why Crude Oil Price is Falling (Views On News)

Jun 25, 2022

Global markets have become volatile, sending chills through the crude oil market.

Tata Group Stocks: Biggest Gainers and Losers so far in 2022 (Views On News)

Jun 22, 2022

Here's how Tata Group stocks have performed amid the volatility in the market.

To Move or Not to Move into Cash Right Now? podcast (Views On News)

Jun 25, 2022

Rahul Shah on whether one should move significantly into cash right now.

Will the Stock Market Recovery Continue? (Views On News)

Jun 25, 2022

The stock market has bounced back a little bit. Can it sustain the nascent momentum?

More Views on News

Most Popular

4 Sectors to Watch for Future Multibagger Stocks (Views On News)

Jun 17, 2022

With India's economic recovery accelerating, these sectors are likely to give multibagger returns in the future.

Why Tata Power Share Price is Falling (Views On News)

Jun 14, 2022

Here's why shares of Tata Power have fallen in recent days.

Is it Time to Start Buying Stocks Selectively? (Profit Hunter)

Jun 16, 2022

Some sectors have corrected by 50%. Do they merit a look?

Best Monopoly Stocks to Own in 2022 Views On News (Views On News)

Jun 18, 2022

Constant product innovation, latest technology, strong supply chain etc can all help companies enjoy monopoly like fortunes.

When Will the Stock Market Recover? (Views On News)

Jun 15, 2022

This is how you can tell the market is going to recover.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jun 24, 2022 (Close)