What do investors need to know about 16 new debt mutual fund categories?

Market regulator SEBI’s directive to Indian asset administrators to classify their debt funds under 16 new categories will benefit investors by creating uniformity in the categorization of schemes.

The Securities and Exchange Board of India in April this year addressed mutual fund houses to re-categorize all their schemes in the new and separate categories pointed out by the regulator. In the debt space there are 16 new categories under which fund houses must coordinate continuing and fresh schemes.

Several mutual fund houses have changed the attributes of their schemes while others are combining plans to comply by the new arrangements. Sebi released its order to institutionalize the scheme categories and peculiarities of each category in October 2017.

 16 New debt categories:

1) Overnight funds– With the maturity of just one day, this open-ended debt scheme invests in overnight securities.

2) Liquid Funds– It’s a small duration fund with a portfolio maturity of lesser than 91 days. A stronger option to savings accounts with a potential to provide higher post-tax revenues, it invests in highly liquid money market instruments like Treasury bills, Commercial paper, Certificate of deposits and debt securities.

3) Ultra short-term bond funds– Low duration funds with maturity varying between 3 to 6 months. It provides a somewhat better return than liquid funds.

4) Low duration fund– This open-ended schemes invest in instruments with a period of varying from 6 months and 12 months. It invests in debt and money market instruments.

5) Money market funds– This open-ended debt fund invests in money market instruments with a maturity up to one year. The money market instruments are adopted by corporate and governments to set up the money for a period which is commonly less than a year.

6) Short term Income Funds– The portfolio funds where the maturity differs from one to three years. One can benefit from them in a growing profit rate scenario. The portfolio comprises investment in debt, money market and government securities.

7) Medium duration funds– This open-ended fund have a period of varying between three years and four years. The portfolio consists of investment in debt, money market and government securities.

8) Medium to long duration funds– This open-ended scheme invests in plans with a period of differing from four to seven years.

9) Long duration Income Funds– The portfolio maturity lies between seven to 10 years. The interest rate fall benefits as the bond prices (NAV) and interest rates are inversely correlated.

10) Floating rate Funds– There is a requirement to at least invest 65 per cent of overall assets in floating rate instruments. Floating rate instruments are typically tied to MIBOR. The interest rate is reset periodically based on the interest rate movement.

11) Gilt Funds– It is a medium to long duration funds with maturity between 3 to 20 years and negligible credit risk. It does not carry credit risk but mere interest rate risk. Minimum 80 per cent of entire assets needs to be invested in G-secs i.e Government securities.

12) Gilt Funds with 10 years constant duration- These open ended debt schemes will invest in Government securities, Two things are compulsory for it; first it must invest in government securities with a maturity time of exact 10 years and second it should invest at least 80 per cent of the total assets in G-secs.

13) Corporate Bond funds– Unlike credit risk funds, these open-ended schemes are needed to invest in corporate bonds rated AA+ and higher. 80% of the entire assets are needed to be invested in highly rated corporate bonds.

14) Credit risk fund– It purchases bonds in lower-rated bonds to achieve higher returns. It is for investors with a large risk appetite. It has to invest 65 per cent of the overall assets in corporate bonds which are at AA rating or below that.

15) Dynamic bond funds– It reduces the interest rate risk as there is a flexibility to change the portfolio maturity according to the interest rate scenario. Maturity is longer when interest rates go down and shorter when interest rates move up.

16) Banking and PSU Funds– This fund inherently needs to invest in debt instruments of banks, public sector undertakings and public financial institutions.

You should understand these funds and their expected returns thoroughly before you choose to invest in any of them.

 Is it time to re-evaluate your mutual fund schemes, with this change?

  • The new categories specify accurately the tenure or type of security a fund can invest in.
  • To some degree, this can help identify the level of risk for funds in a category.
  • Categorisation makes clarity in the type of portfolio you are preferring to invest in, but doesn’t change what or how you invest.
  • It will now be simpler to choose a fund to fit your precise short- or medium-term debt fund requirement.
  • You should consult your financial advisor to check about the schemes you hold and the changes in the scheme.
  • Of course, change in name does not require any action, but any serious change in policy will require a re look. Stay with what you are happy, only withdraw those funds where the administration strategy has totally changed.

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