SEBI may limit FMP's realty sector investments

In an effort to discourage mutual funds high exposure to the real estate sector, capital market regulator SEBI may impose limits on fund allocation to certain sectors in fixed maturity plans (FMP). SEBI, which is undertaking a structural review of FMPs, will also address the issue of asset-liability mismatch at some of the fund houses, according to sources close to the development.

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An assessment of MF portfolios by SEBI shows that some funds have 15-16 % exposure to the real estate sector and nearly 5% to non-banking finance companies (NBFCs), the sources said. MFs’ exposure in realty firms and NBFCs is through pass-through certificates.

Both big and small funds have invested in these two sectors. Some fund houses, especially a few smaller ones, were hit badly when large corporate investors exited in the wake of concerns relating to the quality of paper issued by some real estate companies.

The MFs had invested in such paper on hopes of a higher yield. An early exit by large institutional investors can put fund managers in trouble as meeting redemption requirements at short notice is tough. Their only option then will be to sell part of the investment portfolio.

SEBI now wants to close this early exit option, so that FMPs can operate mainly as closed-ended schemes. So far, the regulator has not imposed any limit on the exposure mutual funds can take in a particular sector, although there are limits in terms of investment in various instruments. Fund houses invest the FMP corpus in corporate and securitised paper, certificates of deposit and commercial paper. “We are undertaking a thorough review of the FMP structure,” a top SEBI official said.


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The sources said SEBI has noticed a mismatch in asset-liability management (ALM) at some fund houses . Although FMPs are short-term funds, fund managers have taken long-term positions in securities (maturity of one year or more), as they get a higher interest. As FMPs are short-term funds, they are ought to be invested in short-term instruments like Tbills.

The most common FMPs vary in maturities between 3 and 13 months. There is also the likelihood of SEBI introducing a lock-in period for FMPs. As a short-term measure, trustees of some fund houses recently instructed distributors to make payment for redemptions of all fixed-income schemes only after the redemption date, but within 10 days of it.

Over the past one year, FMPs have emerged as one of the most popular products as they have scored over fixed deposits in terms of higher yields and post-tax returns. As of end-September , the corpus of FMPs stood at Rs 1,32,000 crore, accounting for nearly 25% of the Rs 5,32,000-crore assets under management of mutual funds.


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from Economictimes