Here we going to continue blog of "CATEGORIZATION OF MUTUAL FUND SCHEMES Part-1"
DEBT SCHEMES
A debt fund (also known as income fund) is a fund that invests primarily in bonds or other debt securities.
Debt funds invest in short and long-term securities issued by government, public financial institutions, companies
– Treasury bills, Government Securities, Debentures, Commercial paper, Certificates of Deposit and others
Debt funds can be categorized based on the tenor of the securities held in the portfolio and/or on the basis of the issuers of the securities or their fund management strategies, such as
– Short-term funds, Medium-term funds, Long-term funds – Gilt fund, Treasury fund, Corporate bond fund, Infrastructure debt fund
Floating rate funds, Dynamic Bond funds, Fixed Maturity Plans
Debt funds have potential for income generation and capital preservation.
Debt Fund Categories as per SEBI guidelines on Categorization and Rationalization of schemes
Overnight Fund | Overnight securities having maturity of 1 day |
Liquid Fund | Debt and money market securities with maturity of upto 91 days only |
Ultra Short Duration Fund | Debt & Money Market instruments with Macaulay duration of the portfolio between 3 months - 6 months |
Low Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration portfolio between 6 months- 12 months |
Money Market Fund | Investment in Money Market instruments having maturity upto 1 Year |
Short Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 1 year - 3 years |
Medium Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of portfolio between 3 years - 4 years |
Medium to Long Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 4 - 7 years |
Long Duration Fund | Investment in Debt & Money Market Instruments with Macaulay duration of the portfolio greater than 7 years |
Dynamic Bond | Investment across duration |
Corporate Bond Fund | Minimum 80% investment in corporate bonds only in AA+ and above rated corporate bonds |
Credit Risk Fund | Minimum 65% investment in corporate bonds, only in AA and below rated corporate bonds |
Banking and PSU Fund | Minimum 80% in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds |
Gilt Fund | Minimum 80% in G-secs, across maturity |
Gilt Fund with 10 year constant Duration | Minimum 80% in G-secs, such that the Macaulay duration of the portfolio is equal to 10 years |
Floater Fund | Minimum 65% in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/ derivatives) |
Dynamic Bond funds alter the tenor of the securities in the portfolio in line with expectation on interest rates. The tenor is increased if interest rates are expected to go down and vice versa
Floating rate funds invest in bonds whose interest are reset periodically so that the fund earns coupon income that is in line with current rates in the market, and eliminates interest rate risk to a large extent
Short-Term Debt Funds
The primary focus of short-term debt funds is coupon income. Short term debt funds have to also be evaluated for the credit risk they may take to earn higher coupon income. The tenor of the securities will define the return and risk of the fund.
– Funds holding securities with lower tenors have lower risk and lower return.
Liquid funds invest in securities with not more than 91 days to maturity.
Ultra Short-Term Debt Funds hold a portfolio with a slightly higher tenor to earn higher coupon income.
Short-Term Fund combine coupon income earned from a pre-dominantly short-term debt portfolio with some exposure to longer term securities to benefit from appreciation in price.
Fixed Maturity Plans (FMPs)
– FMPs are closed-ended funds which eliminate interest rate risk and lock-in a yield by investing only in securities whose maturity matches the maturity of the fund.
– FMPs create an investment portfolio whose maturity profile match that of the FMP tenor.
– Potential to provide better returns than liquid funds and Ultra Short Term Funds since investments are locked in
– Low mark to market risk as investments are liquidated at maturity.
– Investors commit money for a fixed period.
– Investors cannot prematurely redeem the units from the fund
– FMPs, being closed-end schemes are mandatorily listed - investors can buy or sell units of FMPs only on the stock exchange after the NFO.
– Only Units held in dematerialized mode can be traded; therefore investors seeking liquidity in such schemes need to have a demat account.
Capital Protection Oriented Funds
Capital Protection Oriented Funds are close-ended hybrid funds that create a portfolio of debt instruments and equity derivatives
– The portfolio is structured to provide capital protection and is rated by a credit rating agency on its ability to do so. The rating is reviewed every quarter.
– The debt component of the portfolio has to be invested in instruments with the highest investment grade rating.
– A portion of the amount brought in by the investors is invested in debt instruments that is expected to mature to the par value of the capital invested by investors into the fund. The capital is thus protected.
– The remaining portion of the funds is used to invest in equity derivatives to generate higher returns
here we have explained about DEBT SCHEMES, Short-Term Debt Funds, Fixed Maturity Plans (FMPs), Capital Protection Oriented Funds into CATEGORIZATION OF MUTUAL FUND SCHEMES Part-2.
For Hybrid Schemes refer part - 3 of the "CATEGORIZATION OF MUTUAL FUND SCHEMES Part-3"
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