The Securities and Exchange Board of India (Sebi) has tightened the rules for liquid mutual funds. In fact, considering the default by many borrowing companies, it was strictly necessary so that in future investors could be protected from any kind of loss.
After its meeting on Thursday, SEBI has announced several improvements. Sebi's concern is to invest in the non-banking financial companies, especially the lending to the housing sector. SEBI has said that now the liquid fund will be able to invest up to 20% of its total asset in any one sector. So far 25 percent of the investment in any one sector was allowed.
Apart from this, it will be necessary to keep at least 20% of their assets in cash options (short term government securities) so that they can deal with the sudden redemption pressure.
Liquid funds are a short-term fund with easy liquidity. These are debt mutual funds that invest in securities upto 91 days. These funds are useful for investors who have got a huge amount from somewhere and they do not need this amount for one to three months. These are considered to be the least risk funds in the mutual fund.
SEBI Chairman Ajay Tyagi said that there is a need to improve on all the fronts. He said, "Mutual fund investment is different from deposits in banks and it also has an element of investment with security." Significantly, India's mutual fund industry is about Rs 26 lakh crore.
Market regulator has decided to make significant changes in credit rating companies, promoter mortgages, liquid funds and royalty payment system. SEBI has also allowed the limit of investment in liquid credit funded so-called credit enhanced securities to 10% of AUM. This is also called loan against share. At present, mutual fund industry's investment in such securities is about Rs 50,000 crore.
