Summary:

In April, the Reserve Bank of India (RBI) flagged 28 open-ended debt schemes from 12 mutual funds with a total asset value of ₹1.76 lakh crore that were under stress. This revelation came amidst the ongoing investigation into Quant Mutual Fund by the Securities and Exchange Board of India (SEBI).

Table of Contents:

Stress Test Findings:

RBI disclosed that SEBI has instructed asset management companies to conduct stress tests on open-ended debt schemes monthly to assess the impact of various risk parameters like interest rate, credit, and liquidity on their net asset values.

The Association of Mutual Funds in India and AMCs define thresholds for risk parameters, with any breaches requiring reporting and remedial action.

All the mutual funds in question have reported the initiation of remedial actions within the prescribed timelines.

Liquidity Ratios:

AMCs must maintain liquidity ratios above specified thresholds, with calculations derived from different factors like scheme type and asset composition.

Back-testing of liquidity ratios is mandatory for all debt schemes on a monthly basis, ensuring sufficient liquidity to meet potential outflows.

Despite some instances of ratios temporarily falling below thresholds, AMCs promptly rectified the situation.

Market Inflows and Trends:

In April, the mutual fund industry witnessed a significant net inflow of ₹1.90 lakh crore in debt schemes, contrasted with a net outflow of ₹1.98 lakh crore in March.

Volatility in inflows may lead to temporary breaches in stress test benchmarks, especially amidst expectations of RBI repo rate cuts.

Published on June 27, 2024