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Tutorials Let me introduce myself. I am the new debt fund

Let me introduce myself. I am the new debt fund

Demystifying debt funds post-SEBI guidelines on scheme consolidation.
Shreeta Rege Apr 24, 2018

I know most of you find me (debt funds) a bit confusing on a cursory glance.

Let me introduce myself. I am debt funds version 2.0. Let me first give a little background to help you understand why I need to introduce myself.  A few months back, SEBI had asked fund houses to follow the uniform guidelines to structure their schemes with a view to bringing clarity and uniformity among different funds to help investors take informed decisions.

Post re-categorisation of debt schemes, I have 16 categories. But before I start talking about my categories, let me introduce the two main pillars on which this classification rests

 

  1. Maturity/ duration
  2. Scheme Holding

Classification of debt falls in two broad buckets namely duration/maturity and focussed holding.  Before talking about the various categories of debt funds, let us understand the aforementioned classification headers.

1. Maturity

  • Maturity refers to the date on which the bond issuer will pay back the amount loaned to him
  • Based on maturity funds are classified as :

1) Overnight Fund: Invests in overnight securities having maturity up to 1 day

2) Liquid Fund: Invests in securities having maturity up to 91 days

2. Duration

  • Macaulay duration indicates the time required to recoup the initial money invested while purchasing the bond
  • As bond prices fluctuate with change in interest rates, SEBI categorised funds in order of their duration

1) Ultra Short Duration Fund: Invests in securities such that the Macaulay duration of the portfolio is between 3 and 6 months

2) Low Duration Fund: Macaulay duration of the portfolio is between 6 and 12 months

3) Short Duration Fund: Macaulay duration of the portfolio is between 1 and 3 years

4) Medium Duration Fund: Macaulay duration of the portfolio is between 3 and 4 years

5) Medium to Long Duration Fund: Macaulay duration of the portfolio is between 4 and 7 years

6) Long Duration Fund: Macaulay duration of the portfolio is greater than 7 years

7) Dynamic Bond Fund: Invests in securities across duration. Thus based on the interest rate scenario they can have either low duration or high duration

8) Gilt Fund with 10-year constant duration: Invests up to 80% of the portfolio in government securities such that the Macaulay duration of the portfolio is equal to 10 years

 

Scheme Holding

Some debt funds adopt the strategy of investing predominantly in a particular category of money market or debt securities such as corporate bonds, government securities. You can consider these funds as focussed investment funds.

  1. Floater Fund: These schemes invest at least 65% of total assets in floating rate instruments
  2. Money Market Fund: These schemes invest in Money Market instruments having maturity up to 1 year
  3. Banking and PSU Fund: These schemes invest at least 80% of the portfolio in securities issued by PSUs and Public Financial Institutions
  4. Credit Risk Fund:
    • Credit rating denotes the bond’s likelihood repayment. Higher the credit rating higher the likelihood of repayment
    • They are schemes which predominantly invest (minimum 65%) in lower rated corporate bonds as these bonds pay higher interest to compensate investors for higher credit risk.
  5. Corporate Bond Fund: These schemes invest at least 80% of the portfolio in highest rated (AAA) corporate bonds
  6. Gilt Fund: These schemes invest at least 80% of the portfolio in government securities of varying maturity

So did you like my new look?

Signing off- Debt Funds 2.0

Click to clap
8 Comments
Gurdip Arora · 4 months ago
Good information..
Sandeep · 4 months ago
Wonderful way to explain quite a complicated thing.
Congratulations Team Cafe Mutual!!
Shreeta · 4 months ago
Thanks for your kind words.
Reply
Bhavesh Banthia · 4 months ago
Nice presentation about Debt category...
mohan kr Gupta · 4 months ago
Thank you for explanation
chander Shekhar · 4 months ago
Quite good and knowledgeable presentation of debt funds in the changed environment.
It will be nice if various funds of AMC s are presented based on the above classification for our ground level understanding and ready reference.
Shreeta · 4 months ago
Thanks for your appreciation. We are working on the classification and will share it soon.
Reply
Sachin J Sangle · 4 months ago
Very well explained. It clears all my doubts about scheme categorisation of debt MF schemes.
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