In another upgrade for the regulatory framework of the debt funds, SEBI has mandated these funds to retain at least ten percent of their total net assets in the liquid securities, like the cash, government securities, repo on government securities, and the T-bills. This regulation has eliminated overnight, liquid, gilt and gilt funds with a 10-year constant continuation.
Liquidity has always been one of the primary concerns in these. Its impact has increased manifold during this COVID-19-induced lockdown. Poor liquidity is one of the primary reasons behind the winding up of the six Franklin schemes mentioned. Since the underlying bonds in these schemes are not that much liquid, AMC faces difficulty to meet the intensified reclamation pressures. From this panorama, the move appears to be quite a sound one that will help mitigate some risk.
It's also quite remarkable that in the mid-2020, amid the constrained liquidity in the corporate bond markets and the mutual fund companies sought SEBI's permission to make up supplementary investments in treasury bills and also in the government securities and bonds across the corporate bond, banking, and the PSUs, and also the credit-risk funds. Since the debt mutual funds will also now have the exposure to much of the liquid assets as an in-built mandate, it will certainly help in the enhancement of the liquidity of the portfolios.
In the circular, SEBI has also mandated all open-ended debt funds to accompany the stress testing. While the regulations related to the liquid assets will be active from February 1, 2021, those related to the stress testing will be effective from December 1st, 2020.
SEBI has also set up a committee to deliberate on all of these rules and according to the recommendation of the committee, and also the rules related to the total allocation of the liquid assets and stress testing may be modified.