The net asset of the Scheme will be invested in a portfolio comprising substantially of floating rate debt / money market instruments, fixed rate debt instruments swapped for floating rate returns, and fixed rate debt instruments and money market instruments.
- Debt Investments :
Debt securities (in the form of floating rate bond / notes, non-convertible debentures, bonds, secured premium notes, zero interest bonds, deep discount bonds, securitised debt, pass through certificates, asset backed securities, mortgage backed securities and any other domestic fixed income / debt securities including structured obligations etc.) include, but are not limited to :
- Floating and Fixed rate debt obligations of the Government of India, State and local Governments, Government Agencies and statutory bodies (which may or may not carry a state / central government guarantee),
- Floating and Fixed rate Securities / obligations that have been guaranteed by Government of India and State Governments,
- Floating and Fixed rate Securities / obligations of Corporate Entities (Public / Private sector undertakings),
- Floating and Fixed rate Securities / obligations of Public / Private sector banks and development financial institutions.
- Money Market Instruments (fixed / floating rate) include :
- Commercial paper
- Commercial bills
- Treasury bills
- Government securities having an unexpired maturity upto one year
- Call or notice money
- Certificate of deposit
- Usance bills
- Permitted securities under a repo / reverse repo agreement
- Any other like instruments as may be permitted by RBI / SEBI from time to time
Investments will be made through secondary market purchases, initial public offers, other public offers, placements and right offers (including renunciation). The securities could be listed, unlisted, privately placed, secured / unsecured, rated / unrated of any maturity.
The AMC retains the flexibility to invest across all the securities / instruments in debt and money market.
The primary objective of this Scheme is to substantially minimise the interest rate risk for the investors. Conventional fixed interest rate investments are open to interest rate risk and hence volatility of price movements depending on interest rate fluctuations. Floating rate instruments are securities that are repriced at periodic intervals based on certain accepted benchmarks, by virtue of this periodic repricing the interest rate risk is minimised. Fixed rate instruments can also be swapped to generate floating rate returns by using derivative instruments such as interest rate swaps, forward rate agreements etc.
The fixed income derivative market has made considerable progress and has evolved into an excellent tool for risk management. The Scheme intends to use derivative instruments such as interest rate swaps (IRS), forward rate agreements (FRA) and any other derivative instruments as may be permitted by RBI / SEBI from time to time. Derivatives will essentially be used for portfolio hedging and balancing purposes and to generate floating rate return by swapping fixed rate instruments. The fixed income derivative market is evolving rapidly and the introduction of innovative instruments like constant maturity swaps etc. has considerably enhanced the possibilities of managing interest rate risk in the Indian environment.
Floating rate debt issuance is a relatively new concept in India and has grown rapidly with the introduction and wide acceptance of benchmarks such as NSE / Reuters MIBOR etc. The Government of India has also started issuing floating rate sovereign debt which will give a major impetus to the pace of development of floating rate market in India. The Scheme will invest directly in floating rate debt instruments or will swap the returns from fixed rate instruments into floating rate returns or vice versa by the use of derivatives.
The portfolio of the Short Term Plan will normally be skewed towards short term maturities with higher liquidity and the portfolio of the Long Term Plan will be normally skewed towards longer term maturities.
Investment in debt securities will usually be in instruments which have been assessed as "high investment grade" by at least one credit rating agency authorised to carry out such activity under the applicable regulations. In line with SEBI Circular No. MFD/ CIR/9/120/ 2000 dated November 24, 2000, the AMC may constitute committee(s) to approve proposals for investments in unrated instruments. The AMC Board and the Trustee shall approve the detailed parameters for such investments. The details of such investments would be communicated by the AMC to the Trustee in their periodical reports. It would also be clearly mentioned in the reports, how the parameters have been complied with. However, in case any security does not fall under the parameters, the prior approval of Board of AMC and Trustee shall be sought. Investment in debt instruments shall generally have a low risk profile and those in money market instruments shall have an even lower risk profile. The maturity profile of debt instruments will be selected in accordance with the AMC's view regarding current market conditions, interest rate outlook and the stability of ratings.
The Scheme may invest in other schemes managed by the AMC or in the schemes of any other mutual funds, provided it is in conformity with the investment objectives of the Scheme and in terms of the prevailing SEBI Regulations. As per the SEBI Regulations, no investment management fees will be charged for such investments and the aggregate inter scheme investment made by all the schemes of HDFC Mutual Fund or in the schemes of other mutual funds shall not exceed 5% of the net asset value of the HDFC Mutual Fund.
The Scheme may also invest in suitable investment avenues in overseas financial markets for the purpose of diversification, commensurate with the Scheme objectives and subject to necessary stipulations by SEBI / RBI. Towards this end, the Mutual Fund may also appoint overseas investment advisors and other service providers, as and when permissible under the regulations.
Investments made from the net assets of the Scheme would be in accordance with the investment objective of the Scheme and the provisions of the SEBI Regulations. The AMC will strive to achieve the investment objective by way of a judicious portfolio mix comprising of debt securities and money market instruments. Every investment opportunity would be assessed with regard to credit risk, interest rate risk and liquidity risk.
A detailed credit evaluation of each investment opportunity will be undertaken. The AMC will utilise ratings of recognised rating agencies as an input in the decision making process. Investments in bonds and debentures will usually be in instruments that have been assigned high investment grade ratings by a recognised rating agency. In line with SEBI Circular No. MFD/CIR/9/120/ 2000 dated November 24, 2000, the AMC may constitute committee(s) to approve proposals for investments in unrated instruments. The AMC Board and the Trustee shall approve the detailed parameters for such investments. The details of such investments would be communicated by the AMC to the Trustee in their periodical reports. It would also be clearly mentioned in the reports, how the parameters have been complied with. However, in case any security does not fall under the parameters, the prior approval of Board of AMC and Trustee shall be sought.
Interest Rate Risk
The Scheme would try to minimise the Interest Rate Risk within practical limits. The changes in the investment pattern would be based on an interest rate scenario, impact of the developments on the macro-economic front and the demand / supply of funds. The AMC may alter the investment pattern within the stated limits for short term and defensive purposes. The Scheme may use derivative instruments in an effort to minimise the interest rate risk on the portfolio.
The AMC will provide liquidity by investing in securities that would result in a staggered maturity profile of the portfolio. Liquidity will also be managed by investing in the call money / repo markets and other such similar short term highly liquid instruments. The Scheme would strive to invest in securities that have reasonable secondary market activity. In the event of a requirement to liquidate all or a substantial part of these investments in a very short duration of time, the AMC may not be able to realize the full value of these securities leading to an adverse impact on the Net Asset Value of the respective Plans.