From October, AMCs will disclose the portfolio factsheet twice a month and the yield to maturity of the instruments will convey what the market is perceiving about that instrument much faster.
On 22 July 2020, SEBI issued a circular stating, inter alia, that portfolio disclosure for debt schemes shall happen, instead of monthly, on a fortnightly basis. The portfolio shall be disclosed within five days of every fortnight. Moreover, the yield on the instruments shall be mentioned as well. This will be effective from October 1, 2020.
Implication and benefits
The obvious implication is that the section of investors and advisers who look for more data / information about funds they invest in, will have more to chew. Currently, most AMCs disclose the monthly portfolio factsheet with the salient data at a prominent place on the website. In a separate corner of the website, there would be disclosure of the International Securities Identification Number (ISIN) number of instruments in the portfolio. For investors who seek more information on individual exposures in the portfolio, it is not so easy; they have to locate the ISIN number and then do further research on the instrument.
From October, we will get the portfolio factsheet twice a month and the yield to maturity (YTM) of the instruments in the portfolio will convey a lot. The yield level on an instrument is a simple yet powerful tool to gauge the risk level. Better the credit quality, lower the risk and vice versa. Though credit ratings are disclosed and ratings are done by professional agencies, sometimes there is a lag with the market.
Market is faster and more efficient in discovering risk. Hence, along with the credit rating when the yield level will also be disclosed it will convey much more—what the market is perceiving about that instrument. There is a saying in the market “Bhav Bhagwaan” i.e., “price is God”.
To elaborate on this, even within a given rating grade, there are shades, which reflects the market perception. As an example, much before the downgrades started with IL&FS in September 2018, the yield level on a AAA rated DHFL bond used to be higher than a AAA rated HDFC Ltd bond of same maturity.
That is, the market was giving a message that even though these two entities are in a similar business (housing finance), for the same credit rating and same maturity, DHFL bonds carry a relatively higher risk than HDFC Ltd bonds. Even after the IL&FS downgrade in September 2018, DHFL remained AAA for about five months and was downgraded in February 2019. Taking a more recent example, AT1 perpetual bonds of a private sector bank are trading at a very high yield level. This gives a message that the risk level on that bank is relatively higher.
The other benefit of the SEBI circular will be that in case an AMC purchases a security and sells it before the month ends (not to say it happens frequently), the mid-month portfolio disclosure will reveal that. Some time earlier, there was controversy around inter-scheme transfers and it was painted with a negative brush.
But from the transparency or disclosure point of view, a mid-month portfolio will reveal that much faster what a fund is buying and selling. Transactions of AMCs are disclosed, but there is a time lag. If the ISIN number of the instruments is mentioned in the same portfolio factsheet, that will give a good perspective to savvy investors on where their money is being invested.
On transparency, the mutual fund industry is ahead of certain other segments of financial services — insurance, PMS and AIF. This will enhance the disclosure level further. From SEBI’s perspective, PMS and AIF is meant for more evolved investors and regulation is relatively at a lighter touch than MFs, which is meant for the masses.