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Liquidity risk remains in an event of credit downgrades 

January 14, 2016

Chandan Kishore Kant, Business Standard

The Amtek Auto credit crisis affecting two of JP Morgan AMC's schemes in August last year was an eye-opener for India's mutual fund industry. It was quite an important development which underlined a hard-hitting fact that investments in debt schemes can not always be treated as safe.

The Securities and Exchange Board of India's (Sebi's) decision early this week to tighten norms for debt mutual funds is seen as an attempt to restrict repetition of such events in the future to a certain extent. The capital market regulator put caps on exposure of a scheme to debt instruments by an issuer, companies belonging to a group entity. It also put caps on sectoral exposure limits.

It was definitely a much-needed step and the mutual fund industry welcomed it. Sebi has also said that "appropriate" time will be given to the fund houses to adhere to the new proposed norms. Fund managers too have termed it as a "step in the right direction", which will help mitigate the risks by diversifying more.

However, the critical issue of liquidity risk remains. Industry experts say that the risk emanating from the non-liquid nature of several corporate bonds is far bigger and steps should be taken to address the issue. Read more

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