Sebi's measures to help investors make informed decisions

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Sebi's measures to help investors make informed decisions

Over the past few years, the Securities and Exchange Board of India or Sebi has introduced a raft of measures to help investors make informed decisions while selecting fixed income mutual fund options and assessing the risk profile of the schemes. In 2018, Sebi introduced scheme categorisation that ensured that schemes are placed in homogenous buckets with appropriate labelling, enabling investors to identify the scheme profile easily. In each category, a fund house cannot have more than one scheme. The categorisation led to a clear demarcation within schemes that removed overlaps and allowed investors to easily identify schemes from one anotherExamples of fixed income fund categorisation - liquid funds, money market fund, banking & PSU debt fund, credit fund, floater fund, short term bond fund, government securities fund, and so on.It is an important tool which measures a mutual fund's current riskiness - a graphical representation of a mutual fund carries at any point of time - similar to a speedometer of a car. The riskiness of a scheme is visualised in a pictorial six-point scale ranging from low to high risk. In most cases, the riskometer shows a lower risk reading for debt schemes compared to equity-oriented schemes. Riskometer readings can be changed based on the portfolio composition and is scrutinized at the end of every month. The indices used to benchmark scheme performance have their own riskometer readings. The riskometer reading of the index can be compared with the riskometer reading of the fund manager to assess whether the fund manager is taking risk higher than that of the index or not. The fund manager at the time of the scheme chooses the maximum risk the scheme can take and it is reflected in the PRC of the scheme.PRC is a measurement of the maximum risk that can be potentially undertaken in a fixed income scheme in terms of credit quality and portfolio duration, a measure of interest rate risk. The PRC measure communicates to the investor a risk limit beyond which the fund manager cannot go. While choosing a debt scheme, an investor may look at the riskometer to assess current risk reading and also the PRC to assess whether the PRC is in line with one's individual risk appetite, in case the fund manager were to increase the risk level of the scheme later. In addition, since liquidity in corporate bond markets may fluctuate significantly at different times, the Sebi has made it mandatory for debt funds to invest at least 10 percent of their portfolio in liquid sovereign instruments to meet any redemptions without significant impact cost. The liquidity buffer in liquid funds is increased, which is required to be maintained at 20 percent of the portfolio at any given point of time. Besides, the liquidity buffer would increase in a dynamic way depending on the investor concentration and the distributor concentration in each debt scheme. Sebi's measures have led to simpler classification of fixed income debt schemes, better disclosures of the current and potential riskiness of the schemes and building sufficient liquidity buffers at the level of individual schemes, as there is a lock-in on these investments. The measure is probably unique in the field of fund management globally, designed to safeguard the safety of debt investors in a mutual fund by safeguarding the data exchange between multiple agents responsible for updating and maintaining client and transaction data. Security and sanctity of the customer data are essential components of IT infrastructure and cyber security, which require the asset management firm to employ appropriate personnel, systems and security measures to ensure cyber security and data integrity.