Are debt funds well diversified?

Debt funds have deployed nearly 86% of the total corpus in the finance sector, shows data released by SEBI. Of this, MFs have invested close to 45% of their corpus in financial services industry.

 “Broadly speaking, financial services include exposure to bank certificate of deposit (CD), NBFC commercial paper and CDs, development financial institutions like NABARD, SIDBI, NHB, EXIM and so on and so forth. This may also include exposure to Bharat Bond ETFs and others”, explained Dhawal Dalal, CIO-Fixed Income, Edelweiss MF. 

Next in line are bank deposits, repo, TREPS (Treasury Bills Repurchase), T-bills (Treasury bills), G sec (Government Security) and SDLs (State Development Loans) which receive the second-largest allocation of 41.3%.  

While MF Units receive the next highest allocation, it is modest at 3%. And, energy, consumer discretionary and utilities collective garner 5% allocation. 

Sharing the reason behind preferring financial services Anand Nevatia, Fund Manager, Trust MF said, “This sector majorly includes issuances from PSUs viz. NABARD, SIDBI, PFC among others and are the largest issuers of bonds and CPs after GOI. Moreover, these AAA rated PSU PFIs are exempted from the 20% capping of financial sectoral investment.”

Further, for repo, TREPS, T-bills, G Sec, SDLs, Anand said, “They offer high safety and liquidity as against corporate bonds and GOI bonds are ideal to take duration exposure. Additionally, barring overnight funds, the new MF categorisation requires fund houses to mandatorily maintain a certain percent in liquid assets. And G Sec, SDL and T-Bills qualify here.”

While the overall allocation of close to 86% to the financial sector may appear to trigger concentration risk, Dhawal gains comfort from the quality of the underlying exposure. He said, “I see no concerns as long as the underlying exposure is to AAA-rated entities particularly owned by the government or the private sector.”