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Posted by: Uma Shashikant on Thu, Jul 8th, 2010

MTM Impact on Short Term Debt Funds - Part 2

The imposition of the new MTM regime on debt securities is expected to commence on August 1, 2010. The more-than-91-day tenor segment (i.e excluding liquid funds) is where the industry's AUM for this segment lies and therefore the concerns there are higher.

There would be a new column in the Crisil valuation matrix to include the 0.25 to 0.50 duration bucket. Several are asking if this would mean higher NAV volatility for ultra-short term debt funds, which have an average maturity of less than one year.

 

Valuation Perspectives

There are three points to consider from the point of view of valuation:

a. Among the securities with residual maturities of less than one year, CPs, CDs and PTCs do not trade at all.  FIMMDA plans to launch a trading platform for them, pending which they will continue to be amortised (if tenor is less than 91 days).  Very few CPs and CDs are issued for longer tenors, where they have to be marked to market using the Crisil valuation matrix.  PTCs can have longer tenor, but are not traded. Since there are no traded prices, even if the matrix included them, the valuation can be expected to be closer to the amorisation values.

b. Treasury bills are issued for tenors of less than one year (91, 182 and 364 days) and can technically be subjected to valuation in the new regime. The problem here is that they are currently not included in the Crisil Matrix.  Many ultra-short term debt funds do not hold them, perhaps to avoid valuation risks.

c. Sebi circular asks for including all instruments into the valuation model within a fixed time frame after AMFI points out the need to include them.  It is unclear if T-bills, CPs and CDs are in this list or if mutual funds would wait for the FIMMDA platform for CPs and CDs and ask for Crisil Gilt Valuer (the current tool for all G-secs) to be extended to T-bills.

Impact on Funds

The valuation impact on short term debt funds depends on whether the new values to be provided in the Crisil Matrix are better than the noise in the traded prices due to low liquidity and infrequent trades.  The Sebi circular asks for traded prices to be considered where available, or use the valuation model.  Consider this example of the volatility in valuation coming from using the average traded prices as recommended (we have used prices of a listed T-bill)

 

4.0151%

Amortised price

Straight-line accrual (@implied yield of 4.0151%)

Market price T-bill 060810

MTM Impact

Value at amoritised prices

Value at MTM prices

Total Return

6-May-10

99.0089

     

100

100

 

7-May-10

99.0199002

0.011

99.0496

0.0297

100.011

100.041

0.0411

8-May-10

99.0309005

0.011

   

100.022

100.022

-0.0189

9-May-10

99.0419007

0.011

   

100.033

100.033

0.0111

10-May-10

99.0529009

0.011

99.0419

-0.011

100.044

100.033

0.0000

11-May-10

99.0639012

0.011

99.0455

-0.0184

100.056

100.037

0.0036

12-May-10

99.0749014

0.011

   

100.067

100.048

0.0111

13-May-10

99.0859016

0.011

   

100.078

100.059

0.0111

14-May-10

99.0969019

0.011

   

100.089

100.070

0.0111

15-May-10

99.1079021

0.011

   

100.100

100.081

0.0111

16-May-10

99.1189023

0.011

   

100.111

100.093

0.0111

17-May-10

99.1299026

0.011

99.1094

-0.0205

100.122

100.083

-0.0096

18-May-10

99.1409028

0.011

   

100.133

100.094

0.0111

19-May-10

99.151903

0.011

   

100.144

100.105

0.0111

20-May-10

99.1629032

0.011

   

100.156

100.116

0.0111

21-May-10

99.1739035

0.011

99.1657

-0.0082

100.167

100.119

0.0028

Notice the volatility in total return coming from using the traded prices.  It should be expected that the Crisil values where applicable, would be smoother than the jerky and sparse traded prices.

Volatility in total return whether coming from market prices or the matrix can impact ability of the short term debt fund to pay stable daily dividends. The capital gains and losses  to short term investors may also be marginally higher. Given the DDT implication, investors may prefer a mildly volatile dividend to a volatile NAV with capital gain implication.  Since most of the return will continue to come from accrual income, accepting a small level of volatility could be a better choice.  A volatile dividend may be a superior option to an exit load, which imposes rigidity on entry and exit dates.

replica bell ross on Sun, Dec 12th, 2010 7:47:30 am

I like this idea, I completely with you agree.

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