The curious case of rising inter-scheme transfers
MFs transferred over ~1 trillion worth of paper between schemes last year
Asset managers are increasingly making use of a provision to transfer securities between schemes.
Such inter-scheme transfers may compromise the fair valuation of securities, and the regulator has previously expressed reservations about its use.
Then Securities and Exchange Board of India (Sebi) chairman U K Sinha pointed to problems in 2015. “In some instances, we have also found that valuations and inter-scheme transfers are not exactly according to the Sebi requirements… I want you to note… that we are watching. We are aware of what is happening…. I want to give you an opportunity… please try and make amends,” Sinha had said at the Confederation of Indian Industry’s annual MF summit in 2015.
It has only gone up since then. The value of such transactions hit a seven-year high of ~1.67 trillion, shows Sebi data compiled by Business Standard.
Such transfers during the financial crises led to illiquid paper ending up in schemes which hadn't invested in them. The regulator subsequently asked for data on such transfers to be disclosed daily. This data is available since 2009-10, with 2010-11 being the first period with data for the whole year. The previous year had data from August 2009 onwards.
It has not barred such transactions because they may be useful in certain situations. A scheme may wish to sell illiquid paper, which another scheme from the same fund house can use. The transfer of the paper within the fund house can save on costs when
compared to its sale in the open market.
The analysis also looked at the data as a percentage of the mutual funds’ debt assets.
The value of transfers accounted for 14.99 per cent of the average fixed income assets, the highest since 2010-11, shows data from mutual fund (MF) tracker Morningstar India.
This rise is an interesting phenomenon in light of the regulator’s earlier reservations on the issue.
Two MF officials said it was possible that asset managers were stocking debt securities ahead of the issue of fixed maturity plans (FMPs). Fund houses could be buying securities ahead of FMP launches, and transferring the securities once the offer closes. They declined to be identified because of the sensitivity of the issue.
Kaustubh Belapurkar, director (fund research), Morningstar Investment Adviser India, said it could be a plausible explanation.
“They could be looking to make sure they have enough securities to meet demand when such schemes open. There may not be sufficient paper of the required duration available otherwise, considering the lack of liquidity in Indian debt markets,” he said, adding that such transfers only need worry if the transfers don’t conform to the recipient scheme’s attributes.
Vidya Bala, head (mutual fund research), FundsIndia, said there could be multiple reasons for inter-scheme transfers. “Fund houses could be looking to address liquidity requirements. They could be buying securities in a block and then spreading it out within schemes. It could also be because of the rationalisation circular which has taken effect over the last few months, which had many schemes changing their categories and attributes and may have necessitated portfolio adjustments,” she said.
“Since the liquidity situation is different from what prevailed at the time of the financial crises, the risk to investors is accordingly limited,” Bala said.