Amfi asks MFs to include cash component in overall return on debt programs
The Association of Mutual Funds in India (Amfi) has asked fund houses to include the cash components and their respective returns when calculating the portfolio return to maturity (YTM) of debt plans.
The Securities and Exchange Board of India (Sebi) had previously expressed its displeasure with mutual fund companies describing portfolio performance of debt systems leaving out returns on cash and cash equivalents, said people in the know. According to experts, this could increase returns on debt systems and give investors the wrong image of return.
“It is specified that the cash elements and their respective returns must be included in the calculation of the YTM portfolio. It is further specified that the net receivables / debts will be assigned the weighted average return of the cash component and will also be included in calculating the portfolio. YTM, ”Amfi said in a letter to finance homes.
YTM is the total expected return on a bond if the bond is held to maturity. The return on a portfolio is generally calculated by taking the weighted average return of all the securities in the portfolio, including cash and cash equivalents.
Debt plans, other than cash and demand plans, typically have 10 to 20 percent of cash and cash equivalents at different times depending on the needs of the portfolio.
Suppose a plan has 20% cash and cash equivalents and 80% other securities. Suppose the return on the securities that make up the 80 percent is 6 percent, and the remaining part earns about 3 percent.
In this case, the weighted average of the entire portfolio would be 5.4% (80% of 6% plus 20% of 3%). However, if the portfolio’s cash and cash equivalents are ignored, the plan’s return may be set at 6 percent instead of 5.4 percent.
Last year, in November, Sebi made it mandatory for open-ended debt mutual funds to hold at least 10 percent of their net assets in liquid assets from February 1, 2021. Liquid assets include cash. , government securities, treasury bills and government repo securities. Overnight, liquid, gold and gold 10-year constant duration funds have been excluded from the requirement because they hold a higher proportion of these assets.
Loan funds generally held 0 to 5% of their portfolio in cash and cash equivalents before this Sebi diktat. A higher proportion of liquid assets can have a negative impact on returns.
“We do not use a bank fixed deposit product and fund managers should take risks to generate returns. Higher liquid holdings will impact returns and may force fund managers to take higher risks to offset lower returns, ”a debt fund manager told Business Standard last year.
An RBI article from last year suggested that debt MFs should be asked to invest a certain amount in assets such as government bonds and treasury bills as a buffer against sudden repayment demands.