Mumbai: To safeguard mutual fund industry from possible defaults, market regulator SEBI on April 30 asked them to conduct stress test on all liquid and money market schemes every month. Currently, most mutual funds carry out stress testing of their portfolio, particularly for debt schemes. The new move is aimed at strengthening the risk management practices and developing a sound framework for evaluating potential vulnerabilities and provide early warning on the health of the underlying portfolio of these schemes.
In a circular, SEBI asked Asset Management Companies to put in place a stress testing policy which mandates them to conduct stress test on all liquid fund and money market mutual fund schemes. "The stress test should be carried out internally at least on a monthly basis, and if the market conditions require so, AMC should conduct more frequent stress test," SEBI added. These schemes need to be tested on the risk parameters like interest rate, credit and liquidity and redemption.
While conducting stress test, it will be required to evaluate impact of the various risk parameters on the scheme and its Net Asset Value (NAV). Besides, the parameters used and the methodology adopted for conducting stress test on such type of scheme, would be detailed in the stress testing policy, which is required to be approved by the board of AMC. Further, in the event of stress test revealing any vulnerability or early warning signal, it would be required to bring it to the notice of the Trustees and take corrective action as deemed necessary, to reinforce their robustness.
Each AMC would be required to have documented guidelines, to deal with the adverse situation effectively. Such stress-testing policy would be reviewed by the board of AMC and Trustees, at least on an annual basis, in light of the evolving market scenarios. Further, Trustees would have to report compliance with this circular as well as the steps taken to deal with adverse situations faced, if any, in the half yearly report submitted to SEBI. The circular is applicable with immediate effect.
