Why Quantum Liquid Fund Trusts Mark-to-Market Valuation for Investors

Posted On Thursday, Mar 07, 2019


As part of its continued efforts to improve investor protection and transparency, the mutual fund regulator SEBI announced further measures to tighten norms for valuation of debt instruments. Mutual Funds were allowed to value debt instruments of less than 60 days using the principle of amortization as against the fair valuation principle of using daily market prices to mark-to-market. They have now mandated that debt instruments of only less than 30 days can be amortized, all other instruments will have to be marked-to-market.

The concept of amortization suggests that the fund can value the securities by accruing the coupon interest rate daily instead of accounting for changes in the market yields of those instruments. So every day, irrespective of the market price of that instrument, the instrument can be increased in value by accruing (adding) one day’s interest to its previous price. As you can see, if a fund values all its holdings based on the principle of amortization, the NAV of that fund will increase at an almost constant rate daily. If you chart the NAV of that fund, it will move up in a smooth straight line. This is how returns on a fixed deposit will behave. But Debt instruments are not fixed deposits. The returns on debt instruments in which liquid funds and debt funds invest are not fixed and are not guaranteed.

SEBI, correctly, does not want that and hence it has now tightened the regulation to allow that only for instruments which have less than 30 days to maturity.
Although, it is a step in the right direction, but we felt that the time was correct for SEBI to move all instruments to move to Full Mark-to-Market.

The practice of amortizing may have led to some unintended consequences for liquid fund investors. Amortization has distorted fund management as fund managers avoid instruments which need to be marked-to-market even if they happen to be attractive. NAVs of Liquid Funds which follow amortization may also be mis-leading and may not be reflective of the true market value and which comes to light only in case of a default, rating downgrade or during tight liquidity conditions. As we have seen with the recent cases of defaults in liquid funds.

You may have read news articles suggesting that the returns on liquid funds will fall and get volatile. Those articles claim that In order to reduce the volatility, fund manager may buy instruments of less than 30 days thus reducing the effective portfolio yield and hence the return.

For Quantum Liquid Fund though, it is business as usual.
The Quantum Liquid Fund was the first and only fund to follow to full Mark-To-Market valuation philosophy since July 2012. From a fund management and portfolio valuation perspective, nothing changes with this new rule.

There will be no change in the way we evaluate securities, conduct our proprietary research, build our portfolio and endeavor to keep the Quantum Liquid Fund Safe, Liquid and try and earn sensible returns commensurate to the risks it takes.

We will encourage you to read our earlier communciations with regard to the need for investors to prioritise Safety and Liquidity while investing in a Liquid Fund. Liquid Funds are not meant to be wealth generating products. Investors should not invest in liquid funds with an aim to earn high returns.

Product Labeling

Name of the Scheme & Primary BenchmarkThis product is suitable for investors who are seeking*Risk-o-meter of Scheme
Quantum Liquid Fund

An Open Ended Liquid Scheme
• Income over the short term

• Investments in debt / money market instruments.
Quantum Liquid Fund
Investors understand that their principal will be at Low Risk

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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