In my opinion, medium duration debt funds are the best option for a typical retail portfolio, and all other types of debt funds are unnecessary.
I believe it is essential to look at other debt fund types to gain insight into what they are and the potential payoff.
We should begin this discourse by looking at Banking & PSU Debt Funds.
Before continuing, contemplate this and imagine what ‘Banking and PSU debt Fund’ truly implies.
I’m sure if you’re anything like me, you would’ve assumed that the Banking and PSU Debt Fund invests in papers from the banking and public sector undertaking industry – one of the safest industries in India.
Let’s hear what SEBI has to say and decide.
The fund invests the majority of its resources in banking and PSU debt which comprises 80% of its assets. It is important to note the weightage devoted to this category.
The other 20% is put into any sort of document.
At first, the debt fund appeared to be harmless, but it has become complicated.
A regular retail investor looking at this 80-20 cocktail fund would not anticipate that it is composed of any other types of securities aside from Banking and PSU debt. It’s certainly understandable why it might come as a surprise to discover some private sector papers in the mix.
If a default where to take place within the 20% portion of the portfolio, it could have negative implications for the fund’s NAV. Who is accountable in this case? The investor for expecting a pure-play Banking & PSU strategy, the fund manager for their investment decisions, or should SEBI be held responsible for allowing such a mix?
Have a look at IDFC AMCs Banking & PSU Debt Fund –
The portfolio owns 1.27% of Reliance Industries, which could be a great stock to own, but does it fit here?
However, the good part of Banking and PSU Debt fund is that the credit risk is on the lower side for the following 2 reasons:
– The Reserve Bank of India (RBI) offers liquidity assistance to both banking institutions and non-banking financial companies (NBFCs).
– The Indian Government is providing implicit assurance to Public Sector Undertakings (PSUs) through their sovereign guarantee.
However, the remaining 20% of the portfolio does not possess the same ‘credit risk comfort’ as the majority.
SEBI does not stipulate a Macaulay’s duration for the portfolio, meaning that fund managers are free to adjust the duration of their investments. As such, modified duration is likely to be higher in these funds.
Here are the parameters for the IDFC’s Banking & PSU Debt fund –
The average duration of this fund is just over 3 years, putting it in line with similar mid-term investments. Its modified duration is a bit higher than normal at 2.6; should interest rates rise, the NAV may take some time to recover.
Investors aiming to put their money in Banking & PSU Debt funds should bear in mind the need for a minimum investment horizon of 3-5 years.
At this juncture, it is worth noting that we have only just begun to illustrate the varieties of funds available thus far in this module. We have briefly mentioned a few of these types, yet have yet to determine how and if one should invest in any of them.