SEBI has reduced the scope of amortisation-based valuation for debt securities to 30 days from the earlier 60 days. Now, all debt papers with a maturity of 30 days or more will be marked-to-market (MTM). The move will have a strong impact on liquid funds that only hold securities with maturities up to 90 days. As investors in liquid funds look for low volatility in Net Asset Value (NAV), the Sebi mandate will nudge liquid fund managers to put more money in the 30-day papers, whose NAV will be stable but returns will dip.
Besides, rising demand for 30-day papers will widen the spread between those and 60-day and 90-day papers. Investors, however, must keep in mind that MTM risk is minimal for low duration securities. Institutional investors in liquid funds, meanwhile, may shift to the overnight fund category that does not hold credit or interest rate risks. It remains to be seen how fund managers react but one thing is sure - they will stay away from poor quality securities.