WHAT WILL BE THE IMPACT ON VARIOUS ASSET CLASSES POST NEW VALUATION GUIDELINES PRESCRIBED BY SEBI ON MTM OF SECURITIES
LIQUID SCHEMES:
SEBI had come out with guidelines for investment criteria for Liquid Schemes viz. no single paper in the Liquid Scheme should have more than 91 days in residual maturity & the said portfolio can then be calculated for NAV purposes on accrual basis.
Hence, since these guidelines are already in place, there should be no impact on Liquid Schemes.
LIQUID PLUS SCHEMES:
So far Liquid Plus scheme with average maturity of between 120-140 days was also being valued on accrual basis for all debt papers with fewer 180 days in maturity & money market papers with less than 365 days in maturities. Hence Fund Managers used to invest in 1 year CDs combined with less than 6 month NCDs & CPs & still create an average maturity of less than 180 days & value majority (almost 90-95% of the portfolio) on accrual basis with only 5-10% exposure to MTM papers. This was giving comfort to the investors in terms of lower volatility (practically giving positive day to day returns) & higher returns.
Hence, now the major distinction between liquid & liquid plus schemes is that liquid schemes can only have maturity of 91 days or lower; whereas liquid plus can have average maturity of 91 days & above (more closer to 120-140 days); thereby giving tax arbitrage on Dividend Distribution Tax (DDT). Liquid Schemes have DDT implication of 28% plus surcharge v/s 22% plus surcharge for any other debt schemes (including liquid Plus schemes).
Hence, Liquid Plus schemes can go negative on day to day basis if average maturity profiles are longer and MTM portion is higher. Hence, the natural fallout will be that the AMCs will start reducing average maturity profiles & reduce MTM portion to ensure that these schemes generate positive returns over 7-14 days. Hence going forward I foresee most of the Liquid Plus schemes to have exit loads in place for 7-30 days.
I foresee different variants will be created in Liquid Plus Schemes as follows:
- For most conservative investors: maturity of 91 or less days but still qualify as Liquid Plus for tax arbitrage point of view
- Regular Liquid Plus with 100-110 days in average maturity with exit loads between 7-15 days
- Aggressive Liquid Plus Schemes with average maturity of 120-140 days with maybe exit load applicable over 30 days
An analysis of increasing MTM in the portfolio with higher average maturity of 120 days & with the assumption of rate hike of 50 bps, with a holding period of 30 days has given rise to following positive returns scenario under all assumptions of increasing MTM component in the portfolio from 11-100%:
| AVERAGE MATURITY | 120 DAYS |
| HOLDING PERIOD | 30 DAYS |
| RISE IN INT RATE | 50 BPS |
| AVERAGE YIELD | 4.60% TO 4.8% |
| MTM | RETURN PRE EXP & POST RATE HIKE |
| 100% | 2.80% |
| 50% | 3.50% |
| 33.35% | 3.83% |
| 17% | 3.99% |
| 11% | 4.02% |
Hence, one need not look down upon portfolios of Liquid Plus which might have higher MTM components. All one needs to take care while investing in a liquid plus scheme going forward is to ensure longer investment horizon if the MTM component of the portfolio is higher & vice versa.
SHORT TERM PLANS:
Most of the investors are aware of this asset class which falls between liquid/liquid plus on one side and Income/GILT on the other side. This asset class takes more MTM calls than liquid/liquid plus schemes & less than the long ended schemes like income & GILT.
Is there any pre defined definition for Short Term Plans? Answer is no. Also, there are no guidelines by SEBI in terms of what one should invest in, what should be the average maturity of the scheme, what should be maturity of each individual security held in the scheme etc. All this is either spelt out broadly in the OFFER DOCUMENT or within the OFFER DOCUMENT guidelines; the same is defined by the INVESTMENT COMMITTEES of individual AMCs. AMCs only spell out these checks and balances from time to time based on macro & micro economic factors prevalent in the market & try & create risk adjusted returns for their clients.
What is generally the Investment Objective?
Investment objective is to generate income/ returns with low to medium risk strategy by primarily investing in Money Market & Short Term Debt Instruments.
Short Term Plans were created as an asset class to reduce volatility in the portfolio by balancing between Money Market (non MTM instruments) & Debt Securities (MTM instruments) & trying to capture yield differentials over 1-5 year papers. Intention was to generate at least 100-150 bps higher returns than liquid plus schemes. Fund Managers shifted their portfolios from time to time to take advantage of steepness in the yield curve between these maturities & give superior risk adjusted returns from time to time. Within this asset class also various variants came into play like low duration/high accrual, low duration high accrual thru investments in PTCs,etc, taking some credit calls, or even creating 2-3 years average maturity with 100% MTM portfolios. Different perceptions of the market created these different strategies from time to time.
Based on various themes, STPs had MTM component varying from 30-100% of the portfolio & hence those schemes with lower MTM investments were less volatile than others.
However, going forward with new guidelines kicking in, practically all the investments under STPs will have to be MTM & the same must reflect in their daily NAVs. This will make the STPs also more volatile on day to day basis & hence one will have to have a longer horizon of investment before investing in these schemes (preferably 6 months plus). Even various variants like Liquid Plus Plus kind of products will also start falling under this category & will be subject to new guidelines. Here also, exit load structures varying between 3-6 months will start coming into play to safeguard investors from vagaries of day to day volatility.
Is the story in Short Term Plans Over?
New guidelines of valuation have no bearing on whether this asset class still merits the attention of the investors. There is no fundamental shift in the factors which made this asset class quite popular in the recent months. Yield curve still remains very steep & likely to be more pronounced post July 01’2010 (P1+/AAA yields):
| 1 day | 3.50% |
| 3 mths | 4.25% |
| 6 mths | 5.50% |
| 1 year | 6.25% |
| 2 years | 6.75% |
| 3 years | 7.25% |
Hence as can be seen from above every bucket going up in duration is giving incrementally much higher & higher returns. This steepness is what is being captured by the Fund Manager by creating 1-3 years average maturities & also playing on the roll down effects of these investments. For example investment in 1 year paper will continue to give higher accrual of 6.25%; but the same paper six month down the line when it becomes a six month paper (ASSUMING NO CHANGE IN INTEREST RATE SCENARIO) will be quoted at 5.50% & hence giving rise to some capital gains at the same time cushioning the portfolio if there are rate hikes in between.
These stories & various other strategies as mentioned by me in my various notes published on my blog like Kotak Bond Short Term Plan, Templeton India STP, AXIS STP, J P Morgan STP, etc will continue to do well for the reasons mentioned by me in those notes. All that the investor has to be careful is to ensure matching of the investment horizon with the horizon intended for that asset class. Month of June will have some liquidity tightness which can affect short term rates to spike for a very short time; thereafter these STPs will come back on track post June. There is also likely to be some mismatch between Govt spending & their borrowing as Govt already has deficit of close to Rs.30,000 crs with RBI. This deficit is likely to be filled soon with 3 G auction money and advance tax & the same funds will come back into the system when Govt spending picks up post June.
Also, going forward as liquid plus schemes will become less aggressive in their portfolio construction will start earning less & less, these STP strategies can generate 100-150 bps higher than liquid plus with investment horizon of 6 months & above.
Likely MTM & average maturity scenario in various short term asset classes post July 01’2010:
| Current Market Practice | Current Yields | Likely Scenario post July 01’2010 | |
| General Average Maturity Profiles | in % pa | ||
| Liquid Funds | 40-50 days | 4.25 – 4.75 | 40-50 days |
| Liquid Plus Funds | 120-140 days | 4.50 – 5.00 | 100-110 days |
| Short Term Plans | 1-3 years | 5.50 – 7.00 | 6 months - 3 years |
| General Exposure to MTM | |||
| Liquid Funds | NIL | NIL | |
| Liquid Plus Funds | 0-10% | 0-10% | |
| Short Term Plans | 30-100% | Almost 100% |
Comments
Performance of Fortis Flexi Debt Fund in the last six to nine month is nothing to talk about.
Your view on this Sir!
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