According to news reports, the Securities and Exchange Board of India (SEBI) has approved the concept of mutual funds (MFs) of floating dedicated schemes to buy securitised debt from financial institutions.

Now that MFs have been given the green signal to raise funds for investing in securitised debt, the concept of securitisation can finally take off in a big way in India. In securitised deals, the company issues bonds that are backed by receivables. These bonds are then issued to investors. Securitisation as a concept has been very successful in western countries.

While MFs can invest in securitised debt, they will have to disclose the purpose, the credit rating of bonds and the names of the instruments to the investors.

So far, the market for securitisation has failed to take off because of lack of investors in securitised debt. The world over, MFs are among the biggest buyers of securitised bonds. This is one reason why SEBI has flashed the green signal for MFs to invest in securitised bonds. This will encourage banks and financial institutions (FIs) to finance more projects as their receivables will become more liquid.

As far as MFs are concerned, it will provide fund managers with another avenue of investment diversification, apart from equity/equity-related instruments, debt and money market instruments.

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