Here’s Why Debt Mutual Funds Continue to Increase Their Government Securities Exposure?

Jul 24, 2020

Almost a month ago, I wrote to you, After Having Burnt Fingers Are Debt Fund Managers Turning Wise?

Well they learnt it the hard way and now continue to reduce their exposure to debts to shadow banks.

After the very first default news of IL&FS came to the fore the debt fund industry rattled up. More names of defaulters kept making headlines subsequently and debt funds investment being shunned by investors.

IL&FS fiasco followed by DHFL, Reliance ADAG group companies, Essel group companies, Vodafone-Idea (VIL), Altico Capital and ZeeL repayment defaults are even making the fund house rethinking their decisions of structuring their portfolios.

The market regulators did implement measures in order to safeguard the investors interest which pained the fund houses. Allow side-pocketing, capping limits on Liquid funds and now the mandatory increase in government holdings for corporate debt schemes are few of them.

But the biggest eye-opening lesson is the redemption pressure that occurred due to the coronavirus pandemic. This caused illiquidity situation and that led to Franklin Templeton to take a drastic step of winding down six of its schemes that startled the debt markets.

Finally, the RBI swooped in after weeks of turbulence, salvaged the India's debt market. RBI's measures such as lowering of interest rates, conducting long-term repo operations, purchases of government bonds, etc.

Image source: Image by Raten-Kauf from Pixabay

The government too stepped in to extend credit line and collateral-free loans to boost financing options for corporates. These measures by the central bank and government have started to bear fruit.

[Read: How SEBI Plans To Ensure That Liquidity of Debt Funds Is Not Compromised]

Some strong indicators highlight improved debt market conditions. Banks are now parking lower funds in RBI's reverse repo window, which points out to increased lending and lowering of risk aversion by banks. Further, yields on corporate bonds and commercial papers have dipped by up to 30 bps after RBI's record rate cuts.

Moreover, media reports suggest that sales of riskier bonds rose to a 15-month high in June, rebounding sharply from April-May levels on the back of stimulus. All this has helped in the ease of raising capital and reduced borrowing cost for corporates.

Debt mutual funds too have benefitted from the stimulus. Banks deployed around Rs 8,000 crore (from their own resources and through RBI's special liquidity facility) in mutual funds to ease liquidity.

[Read: Why You Need To Be Extra Careful While Selecting Debt Mutual Funds Now]

Hence the fund houses are being extra careful about the instruments held in the schemes' portfolio. The recent SEBI data reveals that the debt mutual funds have seen reduced investments in to shady banks and taking more exposure to government securities (see below).

Table 1: Rise in investments in government securities

Asset type Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20
Government Securities 98903 113781 111533 116210 137605 152767
Commercial paper (real estate, NBFC, and others) 307097 278625 225610 281694 311750 272242
Bank Certificates of Deposit 159758 159844 133560 121833 104962 73409
Treasury Bills 162347 137640 62169 81568 182166 200398
CBLO 110375 108855 112337 111012 123153 124024
Other Money Market Investments 29116 41246 40888 40868 55965 63441
Corporate Debt(Including Floating Rate Bonds, NCDs and Others) 419466 432703 398439 364419 386756 359219
PSU Bonds / Debt 208679 211705 198388 196618 203836 201720.5
Asset backed securities 11442 11216 10462 10185 10997 9528
Single Sell Downs / Single Loan ( 414 416 418 411 393.34 375
Bank FDs 16976.01 16894 14586 14056 15469 14414
Any other 20237 22208 5943 14198.9 14509 15659
Total 1544811 1535132 1314333 1353072 1547560 1487197
Note: The values are in crores in rupees

Besides, there seems to have been a little improvement in debt market as Vodafone did pay Franklin Templeton Mutual Fund house which will soon be distributed to the unitholders. So did UTI MF did receive money from ZEEL which to would be credited to unitholders' account as per their proportional investment.

Debt funds are suitable for low-to-moderate risk profile investors. These funds are ideal for short-term investment goals ranging from a few days to as many as two to three years more.

Based on where debt funds invest, such as overnight securities, money market instruments, corporate bonds, government securities, etc. and the average duration of the bonds in their portfolio, the funds are classified further as Liquid Funds, Short Duration Funds, etc.

In the current volatile and uncertain market conditions, only funds that own a minimum of 80% in the Government of India or PSU debt papers may be considered. Stay away from those having high exposure to private issuers.

Before investing in debt funds, understand the various risks involved and invest in schemes where the portfolio risk aligns with your risk appetite and financial objective.

The most important thing investors can do is to choose a scheme wisely based on the following parameters:

  • Your investment tenure,

  • Your risk profile,

  • Your financial circumstances

  • The fund house's characteristics, that highlights investments systems and the process followed,

  • The experience of the fund manager,

  • Assess if the credit quality of the investments papers held is congruent with your risk profile

  • The maturity profile of the overall scheme,

  • Qualitative parameters like Sortino and Sharpe ratio,

  • The corpus and expense ratio of the scheme,

  • The interest rate cycle,

  • The performance of the scheme in various market cycles in terms of rolling returns.

Lastly, while investing in debt funds prefer the safety of capital over returns.

Alternatively, if you prefer to keep your capital safe, opt for bank fixed deposits.

At PersonalFN, we arrive at top rated funds using our SMART Score Model. I recommend that if you wish to select worthy mutual fund schemes, subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!


Warm Regards,
Aditi Murkute
Senior Writer


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