Where do debt funds invest?
Understanding debt paper
Debt funds mostly invest in government securities, PSU bonds, deposit bank certificates, commercial paper and corporate debt paper. “Investments in debt funds are made in line with the investment mandate of the respective scheme. For instance, gilt fund can invest only in central or state sovereign credit, while corporate bond funds largely seek to invest in corporate debt of private or public sector undertakings. Commercial papers and company deposits are short term issuances of residual maturity of up to one year,” said Lakshmi Iyer, chief investment officer of debt at Kotak Mahindra Asset Management Co. Ltd.
Knowing the structure
According to a Care Ratings report for April, corporate debt papers have the highest fund exposure of Rs 4.2 lakh crore with a share of 30% in debt mutual funds. The exposure has reduced by Rs 14,000 crore over the previous month. This includes floating rate bonds and non- convertible debentures (NCD). Commercial papers have the second-highest exposure of Rs 4.09 lakh crore with a share of 29%. Funds deployed in bank certificate of deposit and G-secs are stable with shares of 15% and 4% respectively. Investment in other asset types increased to 10%. This includes treasury bills, bank FC and other money market investments.
How to read it
“When it comes to debt funds, you should not look at the instrument but the company issuing it. Bank deposits are more secured than commercial papers. Government securities are safest as they have sovereign guarantee and lower probability of default,” said Sandeep Agarwal, senior fund manager, Sundaram Mutual. Commercial paper and bank deposits are unsecured, and PSU bonds are corporate bonds by PSUs. “But PSU bonds are not always safer than commercial paper. You should look at the company issuing it and look at the type of the product as well,” said Agarwal.