In its efforts to reduce debt mutual funds’ overexposure to specific sectors, the Securities and Exchange Board of India (SEBI) may, on the recommendations of the Mutual Fund Advisory Committee impose a sector cap on the debt mutual fund schemes. At present there is no such sectoral cap. Each fund house decides how much it will invest, in which sector. The proposal to impose a sector cap on the debt mutual fund schemes has been raised after the SEBI observed several debt funds, especially Fixed Maturity Plans (FMPs), were taking huge exposure in specific sectors, raising worries about systemic risk.
The advisory committee has recommended a cap on debt schemes’ exposure to any sector at 30% with an aim to reduce exposure of debt schemes to non-banking finance companies (NBFC), as they have the largest exposure, followed by banking and public sector undertakings (PSU).
We are of the view that, imposing a sector cap on the debt mutual fund schemes will bring in diversification benefits to the investors. Moreover, a cap of 30% is quite sufficient to derive any opportunities available under a particular sector. And at the same time the particular debt mutual fund scheme will not be over exposed to a particular sector. For instance, if 75% of a fund’s investments are in metals & mining, the fund would be dependent on metals & mining to deliver returns. But if there is a sectoral cap, the returns that the fund will generate will come from different sectors. So, say the fund invests 30% in metals & mining, 30% in banking, 20% in engineering and the rest maybe in pharma and FMCG. This will result in the returns getting spread across multiple sectors along with the risk.
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