Debt funds have been in the spotlight for various reasons. As a result, concerns over fund houses investing in risky assets have increased more than ever.
Keeping this in mind, AMFI has asked fund houses to include some additional disclosures in their monthly factsheet. The objective is to bring transparency and uniformity in these disclosures so that it becomes easier to evaluate the quality of debt funds.
Among the key disclosures will be macaulay duration, modified duration, average maturity and yield to maturity. Currently, fund houses do not publish all these measures separately in their factsheets.
Macaulay duration of a fund measures how long it takes for the price of a bond to be repaid by the cash flows from it. Simply put, it indicates the time an investor would take to get back all his invested money in the bond by way of periodic interest as well as principal repayments. In MF parlance, Macaulay Duration of a debt fund is the weighted average Macaulay Duration of the debt securities in the portfolio.
Similarly, modified duration measures the sensitivity of a bond’s price to the change in interest rates. The higher the duration, the more volatility the bond exhibits with change in interest rates. For instance, if the modified duration of the fund is four, it indicates that the price of the bond will decrease by 4% with 1% or 100 bps increase in interest rates.
Yield to maturity of a debt fund is the rate of return an investor could expect if all the securities in the portfolio are held until maturity. For instance, if a debt fund has an YTM of 7%; it means that if the portfolio remains constant until all the holdings mature then the return to the investor would be 7%. However, the YTM does not remain constant as some of the debt instruments are actively traded by the fund manager.
Average maturity is the average time it takes for securities in the portfolio to mature, weighted in proportion to the amount invested. It indicates the sensitivity of the portfolio to interest rate changes. The higher the average maturity, the greater is the volatility of returns in the fund. It helps investors check if debt funds are suitable for the time horizon of your investment.
AMCs will also disclose maturity for Pass Through Certificates (PTCs). PTCs are certificates given to the investors including banks and mutual funds, where repayment comes from a basket or pool of underlying loans, usually loans taken by individuals. This will help an investor evaluate exposure of the fund house to risky assets.
Besides, AMCs will also have to disclose their exposure to perpetual bonds, AT1 bonds and Tier II bonds. AT1 bonds are a special category of debt issued by banks without any expiry date that allows banks to meet their long-term capital requirement.
Checking exposure to such funds is necessary for an investor as although these bonds pay a slightly higher interest but they are in no obligation to pay back the principal to investors.
