The stress testing analysis carried out for all open-ended debt schemes by all asset management companies for March 2023 revealed stress in the case of 14 mutual funds.

The assets under management (AUM) of the open-ended debt schemes, which were found to have experienced stress, amounted to ₹1.08-lakh crore, as against the total AUM of ₹10.95-lakh crore for all schemes for which the stress testing was conducted.

The stress is on the back of huge redemptions after the government withdrew the long-term capital gain benefit for income from debt funds.

Stress testing process

As mandated by the SEBI, the stress testing of all open-ended debt schemes (except overnight schemes) is carried out by asset management companies every month to evaluate the impact of various risk parameters including interest rate risk, credit risk, liquidity risk and redemption risk faced by such schemes on their net asset values.

The findings of the stress test done in March were disclosed by the Reserve Bank of India which stated that 24 out of 295 debt schemes (except overnight funds, gilt funds and gilt funds with 10-year constant duration) of all mutual funds for March 2023 revealed credit, interest rate and liquidity risk.

The same stress test on debt mutual funds carried out between March 2022 to September 2022 had not found any risk.

In March this year, the government scrapped the long-term capital gains treatment on income from debt mutual funds and other schemes that invest up to 35 per cent in equity shares of domestic companies.

Earlier, capital gains arising from transfer of mutual fund units, other than equity-oriented funds held for over three years were considered as long-term investment and taxed at 20 per cent with indexation benefits.

The withdrawal of tax benefit led to a net outflow of ₹81,015 crore in March quarter. Even otherwise, debt mutual funds were registering a steady outflow due to rising interest rate.

As a part of liquidity risk management, the central bank said the open-ended debt schemes experience redemption at risk (RaR) arising out of outflows at a given confidence interval and conditional redemption at risk (CRaR), which represents the behaviour of the tail at the given confidence interval.

Liquidity ratios

All the AMCs are mandated to maintain these liquidity ratios (RaR and CRaR) above the threshold limits, which are derived from scheme type, scheme asset composition and potential outflows (modelled from investor concentration in the scheme), said RBI.

The RaR and CRaR computed by top 10 mutual funds (based on AUM) for 13 categories of open-ended debt schemes for April were well above the respective threshold limits for most of the mutual funds. In the few instances, in which the ratios were below the threshold limits, they were addressed by the respective AMCs, said RBI report.

RBI Governor Shaktikanta Das, said financial stability is non-negotiable and all stakeholders in the financial system must work to preserve this at all times.

Since the last FSR in December 2022, the global and Indian financial systems have charted somewhat different trajectories and the global financial system has been impacted by significant strains since early March from the banking turmoil in the US and Europe, he said in the RBI’s Financial Stability Report.

The RBI and other financial regulators remain steadfast in their commitment to safeguard financial stability in the face of potential and emerging challenges, he added.