The regulator is working on guidelines which will require debt schemes to have a T-bill or a G-security rate as their first benchmark; industry experts have mixed views on SEBI’s latest move
Market regulator Securities and Exchange Board of India (SEBI) is looking at realigning the benchmark of debt schemes. This move, according to SEBI, will provide a better comparison between absolute returns of a scheme and the benchmark to retail investors. The regulator has proposed that the first benchmark of all debt schemes has to be either a one-year tenured Treasury-bill (T-bill) rate or ten-year Government-security (G-Sec) rate depending on the maturity of the scheme. The second benchmark would remain the same as chosen by the fund house.
Currently short-term and ultra short-term debt funds are benchmarked to Crisil ST Bond and Crisil Composite Bond Fund Index.
However, some industry experts believe that changing the benchmark of debt schemes will be of little relevance. “These benchmarks are good and robust indices and the composition of these indices broadly reflects the asset allocation of the funds in the categories. For example, a Crisil Liquid Index would comprise a mixture of treasury bills, certificates of deposit (CDs) and commercial paper (CP) and other money market instruments, which is the broad category of assets that liquid funds invest in. So the current indices, which are used as benchmarks, are better suited as performance indicators rather than T-bills and govt securities. But since SEBI is proposing these as additional benchmarks, investors are given additional tools to evaluate performance,” said Ganti N Murthy, head-fixed income, Peerless Mutual Fund.
The 364-day T-bill is currently trading at 5.22% at the last cut-off and the 10-year 2019 expiry G-Sec rate is around 8.09%.
“T-bill or 10-year G-Sec would be a better benchmark. It may not be a technically right benchmark but it would be useful as retail investors have limited knowledge on debt funds. A lay investor can understand T-Bill or 10-year G-Sec from any financial newspaper,” said Vivek Rege, CFP, VR Wealth Advisors Pvt Ltd.
Besides, the regulator has also proposed to keep the expense ratio of debt funds at 1% by doing away with different expense slabs.
Debt funds typically invest in fixed-income instruments like government securities, corporate bonds, certificates of deposit, debentures, etc.
“There are advantages and disadvantages in using government securities and treasury bills as benchmarks. I think SEBI wants to use these as benchmarks as these are the risk-free rates, which are available in the market. But since most funds invest in a mix of both treasury bills/govt securities and corporate paper that is priced at a spread over and above government paper, these funds would always show a better return than these benchmarks. In a way, one can say all the funds have beaten the benchmark in performance. For them, the standard benchmark proposed may be more useful,” adds Mr Murthy.
Some experts believe that SEBI’s plans are in the right direction.
“I personally understand a Crisil benchmark and its relevance in benchmarking, but we should agree that a mutual fund is a product made for a layman, and for him to understand and appreciate a Crisil benchmark would require a higher investor literacy, which is absent,” added Mr Rege.