In an attempt to help small investors from incurring a heavy loss during the volatile bond market situations, the Securities and Exchange Board of India (Sebi) may start a 'liquidity buffer' for all liquid funds, The Times of India reported, citing people aware of the matter.

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Sebi has set a working committee which is proposing the mechanism to the regulator's mutual fund advisory, the sources told ToI, adding that the move taken by Sebi would help the small investors to fall back on in case of sudden changes in the bond market, especially the small and retail investors.

The buffer structure would be similar to the statutory liquidity ratio (SLR) for banks, and liquidity coverage ratio (LCR) for NBFCs, the report said citing sources.

If approved by Sebi, the new rule would require all liquid funds to compulsorily invest some percentage of their AUM (assets under management) in zero-risk debt instruments like government bonds and treasury bills, noted the report.

These instruments could be sold quickly, which will protect the fund from a distress sale of other holdings that are less liquid than those held in the liquidity buffer, added the report, citing a source. A Sebi spokesperson declined to comment if the market regulator was planning on such a proposal, TOI said.