According to Crisil Fund Research, as many as 36 mutual fund (MF) schemes have more than the Sebi-prescribed 10% investment in these bonds. Last week, the markets regulator came out with a set of directives that would have the effect of reducing appetite for AT1 bonds among MFs.
These bonds, although debt instruments, have loss-absorption features that result in their being treated as quasi-equity. The write-off of these bonds issued by Yes Bank and Lakshmi Vilas Bank, following the RBI action to protect depositors, had highlighted the risk that investors face in them.
Sebi’s March 10 circular caps investments by a fund house under all its schemes in bonds with special features (primarily AT1 and AT2) to not more than 10% from one issuer. It also specifies that no MF scheme can hold more than 10% of its net asset value (NAV) of its debt portfolio in such bonds, and not more than 5% of the NAV of the debt portfolio should be due to such bonds from one issuer.
According to the finance ministry memo, MFs hold Rs 35,000 crore of the outstanding AT1 bond issuances of about Rs 90,000 crore. While the finance ministry had asked Sebi to withdraw the revised valuation norms to treat all perpetual bonds as 100-year instruments, it said that the 10% ceiling for MFs could be retained as the fund houses have enough headroom.
Crisil’s analysis of February 2021 MF portfolios shows that none of the fund houses crosses the threshold of 10% of such instruments at the asset management company (AMC) level. However, 36 schemes spread across 13 fund houses breach the cap of 10% per scheme in securities.
“The regulator’s move to ‘grandfather’ limits previously held is a positive move. In the medium to long term, with the restrictions in place, it could reduce appetite among MFs for these securities, thus limiting the risk for investors,” said Crisil Funds Research director Piyush Gupta.
“This is also prudent given the advent of hordes of individual investors into debt funds. They may not have the ability to understand MF portfolios and gauge risk, especially in such types of bonds — we saw how they were caught unawares by the recent write-offs,” he added.