Domestic MFs Meet AMFIs to Seek Clarity on Bad Assets

April 21, 2009	(Be the first to rate this story!)  Loading ...
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Officials from select domestic mutual funds are believed to have met Association of Mutual Funds of India (AMFI) on Monday to sort out a grey area involving possible defaults by firms, who sold bonds and fixed income instruments to mutual funds. The issue that some of the fund houses are facing relates to possible sticky assets and the way it should be treated - whether the fund writes it off entirely or makes a provisioning against the asset, according to sources. Currently, there is no clear rule on how a mutual fund should treat an investment that goes bad. A downgrade happens when the company is finding it difficult to raise the required funds, heightening uncertainty about its ability to service its interest cost and fulfil its immediate debt obligations. The rating downgrades made it difficult for mutual funds to sell these papers in the market, even as outflows from schemes, which held these papers, were unabated, especially in October.

Against this backdrop, mutual funds are seeking clarity on whether they should start provisioning immediately when a paper is downgraded or wait for it to slip into the default category or eventually default. If mutual funds have to provision for bad assets, the numbers will appear as an expense and will result in the net asset value (NAV) falling in the concerned scheme.

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