India to allow funds more exposure to government bonds

Mumbai: India's capital market regulator has allowed some categories of debt mutual funds to invest more in government bonds and treasury bills.

Corporate bond funds, banking & PSU funds and credit risk funds can invest an additional 15% of their assets in sovereign bonds or treasury bills, according to a letter from the Securities and Exchange Board of India seen by Bloomberg News. The increase in investment limit was sought by the mutual funds trade body and is valid for three months, according to the letter.

Sebi wants to make the portfolios of these products liquid after mutual funds witnessed large redemptions last month in the wake of Franklin Templeton's shock decision in April to wind up $4.1 billion of its debt funds in India.

"Liquidity problem with lower-rated corporate debt has been ignored for very long time and that is now haunting the entire debt mutual fund space," said Pankaj Pathak, fixed-income fund manager at Quantum Asset Management Co.

Spokespersons at Sebi and the Association of Mutual Funds of India declined an immediate comment.

Sebi has changed the design for the three funds to make room for the increase in holdings of government debt. Corporate bond funds must now invest at least 65% of assets in AA+ and above rated papers. Similarly, for credit risk funds minimum 50% of total assets should be in AA and below rated corporate bonds.

For banking and public sector unit funds, minimum 65% of assets have to be invested in debt issued by banks, state-run firms, municipal bonds and public financial institutions, according to the letter.