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The dream run by ultra short-term funds — which account for a lion's share of the Rs 7-lakh crore mutual fund assets in the country — is likely to face some challenges from July onwards. Though the new valuation norms could impact the ultra short-maturity schemes (and other debt schemes) adversely as the volatility of the declared daily NAV (net asset value) and consequently that of the portfolio returns may increase, experts are of the view that funds are in a position to tide over the storm by tweaking the maturity profiles.Otherwise, investors are likely to return to liquid schemes which would not be impacted as their maximum residual maturity is necessarily less than 91 days are still expected to yield better returns than bank deposits.The new valuation norms effective July 1, 2010 require fund houses to value non-traded or thinly traded securities that have a residual maturity longer than 91 days (revised from the current 182 days) at the benchmark yield/matrix of the spread over risk free benchmark yield obtained from agencies entrusted for the said purpose by AMFI. The cover of not having to mark-to-market and therefore insulating it from the market volatility will end, even leading to negative returns. "While ultra short-maturity schemes have limited investments with maturity exceeding one year, they normally have around two-thirds of the AUM in instruments with a residual maturity exceeding 91 days," ICRA said.Dhirendra Kumar, chief executive and founder of Value Research, said, "As far as these ultra short-term funds (formerly known as liquid plus funds) are concerned, there is a little bit volatility expected this year. I think every fund companies are prepared to face the volatility blues. Last year they yielded the most predictable returns to the investors as they were not volatile at all throughout the year. Looking at the downward trend of various fund values, investors would go for a cautious investment this year too. I feel there would not be any big change in their appetite for the funds even after the guidelines come into effect."Experts say mutual funds could ride the storm by reducing the maturity profile, thus lowering NAV volatility. "I do not see any big change after July 1 guidelines. Even if there is a slight volatility in the funds, fund managers are ready to reduce the maturity profile of their funds concerned, resulting in getting slightly lower return though, the appetite would remain same like last year. In 2009-10, the distribution tax on these funds was lower than liquid funds, so the funds gave better dividend to the investors. Also, there was a maturity period restriction of 91 days on liquid funds while there was no time-bound restriction on liquid plus funds. So I hope the investors would get the same returns if these things remain same like the last year," said Kartik Shrinivasan, Co-head of the financial sector rating, ICRA Ltd.
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