Liquid funds invest in papers of 91 days maturity and below. Recently, the Securities and Exchange Board of India (Sebi) changed the valuation norms for these funds.
Earlier, they had to use mark-to-market valuation for papers of 60 days and above. Now, they will have to use this valuation approach for papers of 30 days and above.
Mark-to-market valuation means that papers have to be valued in the portfolio according to their valuation in the secondary market. The other method of valuation is the accrual method. Suppose that a paper was purchased at Rs.95 and will pay Rs.100 on maturity. In this case, the paper is valued at Rs.95 initially in the portfolio. The interest rate of Rs.5 is divided by the tenure and this amount is added to the valuation of the paper each day. Thus, the valuation of that paper moves steadily in a straight line and is not affected by swings in valuation in the secondary market.
But, the accrual method of accounting has a downside. The credit risk in the paper gets hidden. Suppose that a fund manager, in his quest for higher returns, has invested in a lower-grade papers. Usually, when credit risk rises in a bond and there is fear of a default, its price plummets. The risk in the paper gets immediately reflected in the NAV of the liquid fund if it is mark-to-market. The fund manager could then try to exit the paper, if he can. Investors will also become aware of the risk in the portfolio faster and could, if they want, exit the fund.
Denne historien er fra April 2019-utgaven av Investors India.
Start din 7-dagers gratis prøveperiode på Magzter GOLD for å få tilgang til tusenvis av utvalgte premiumhistorier og 9000+ magasiner og aviser.
Allerede abonnent ? Logg på
Denne historien er fra April 2019-utgaven av Investors India.
Start din 7-dagers gratis prøveperiode på Magzter GOLD for å få tilgang til tusenvis av utvalgte premiumhistorier og 9000+ magasiner og aviser.
Allerede abonnent? Logg på
ASK THE EXPERT
Ques. One of my friends told me that your company provides detailed Retirement plans. I want to know what is the procedure to get my Retirement plan. I will be retiring in March 2025. R.P Gupta, Noida
How to Naturally Reverse Fatty Liver Disease
The liver, located on the upper-right side of the abdomen, is the body’s largest internal organ and plays a critical role in detoxifying the blood and processing nutrients.
Banking sector which has underperformed in the last two years, now offers a favorable risk-reward profile
Do you think the market is overpriced? Is yes, should investors refrain from investing in index schemes at the current valuation?
India will continue to enjoy benefits of a close US relationship and trade will continue to grow
Q1. The US elections are said to be one of the closest till date, what impact will the election of a Republican / Democratic party have on the US economy and how is that going to affect India in the short as well as the long term?
Understanding Momentum Funds
Momentum funds are a type of investment fund that focuses on companies experiencing positive momentum in factors such as earnings, revenue, and stock price movement.
Risks and opportunities associated with Small Caps
Small-caps are a stock-picker’s paradise.
How to navigate your portfolio through bull market a
Indian equities have been in a bull run for the past four years.
Choosing mutual fund schemes depending on your age to achieve life goals
The choice of mutual fund (MF) scheme might be influenced by one’s risk profile or age.
Thematic Fund Or Sectoral Fund, Which Fund Suits You?
A thematic fund is a type of mutual fund that focuses on investing in companies based on specific themes or trends.
Be Kind To Your Kidneys
The kidney is a vital organ in our body which is four inches long and two and a half inches in width.
