Open-ended debt schemes are the type of mutual fund whose units, unlike their closed-ended equivalents are not traded on the stock exchange. Also, the number of units that the fund can issue has no upper limit. Investors can buy units from the fund on any working day at the existing Net Asset Value (NAV) of the scheme. The NAV is defined by the performance of the underlying securities of the fund. These schemes do not have a maturity period. The open-ended debt schemes come with various advantages such as high liquidity, easy performance analysis, and availability of SIP. They can also help the investor over tax gains as in the case of open-ended funds, the tax rules and rates change with the ratio of investments made by the scheme in debt and equity. Although, the disadvantage of such type of fund is that they are highly volatile.

Indian market regulator, the Securities and Exchange Board of India (SEBI) recently issued a circular on prudential norms for liquidity risk management of the open-ended debt funds. It is believed that this move will considerably increase liquidity in some of the categories of debt schemes. SEBI also urged the Association of Mutual Funds in India (AMFI) to prescribe a proper framework in its consultation, for liquidity risk management of open-ended debt schemes. The key points given in the circular are discussed below.

The new framework suggestion: A board or committee was set up for discussions on new rules concerning the holding of liquid assets in open-ended debt schemes. Based on the recommendations of the board committee, AMFI is informed to prescribe a suitable framework, in consultation with the Securities and Exchange Board of India, for liquidity risk management for open-ended debt schemes within a time of one month from the date of issuance of the circular. The new framework will not include any rules for Overnight Fund, Gilt Fund, and Gilt Fund with a 10-year constant duration. The framework shall be adopted by all AMCs.

Pare 1(b) changes: The circular also clarifies om the below-mentioned things,

• For all regulatory limit calculations other than Asset Allocation Limits such as Macaulay Duration, Risk-o-meter, investment restrictions pertaining to the issuer, and sector and group the base must be considered as 100% of Net Assets.
• For asset allocation limits which are applicable for Banking and PSU Bond Fund, Floater Fund, Credit Risk Fund and Corporate Bond Funds scheme, the base must be considered as Net assets excluding the extent of the minimum stipulated liquid assets which are 10%.

Applicability of circular: This framework specified by the Association of Mutual Funds in India (AMFI) in collaboration with SEBI will come into effect from December 1, 2021, and will be applicable to all the existing open-ended debt schemes and also to schemes yet to be launched excluding Overnight Fund, Gilt Fund and Gilt Fund with a 10-year constant duration. However, mutual funds have an option, choose to adopt the framework specified by AMFI before the effective date.

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