Financial Awareness Level
How Do Mutual Funds Invest In Bonds?
Mutual funds invest in debt securities in the secondary and primary markets. Debt securities are managed by fixed-income fund management teams. These teams comprise experienced fund managers, macro specialists, researchers and risk management experts.
Debt securities represent a loan where the borrower pays interest (also called coupon). The borrower could be the government or a corporate entity. Investing in debt securities requires specialized skills. Securities and Exchange Board of India (SEBI) regulates the market to ensure tighter risk control.
Markets and Types of Instruments
Money Market Instruments include, but are not be limited to:
- Treasury Bills (T-Bills)
- Certificate of Deposits (CDs)
- Commercial Paper (CPs)
Debt Capital Markets include, but are not be limited to:
- Central Government Securities (CG Secs)
- State Government Securities (SG Secs)
- PSU Bonds
- State Government Undertaking Bonds
- Corporate Bonds
Large institutional players, including banks, insurance companies, retirement funds and mutual funds, dominate the debt capital markets. However, a large part of the debt market lacks sufficient liquidity, leading the players to engage in off-market or negotiated deals, which must be reported to the exchanges. This poses a liquidity risk for mutual funds, that offset this risk by keeping a portion of their investment capital in cash or money market instruments.
While investing in debt securities, mutual funds must follow their stated investment objectives and adhere to security and group-level exposure limits. They must also monitor redemption dates and replace maturing securities with suitable ones. In addition, mutual funds must comply with SEBI’s provisions on categorization and rationalization of schemes. For example, corporate bond funds must invest minimum 80% of their total assets in corporate bonds (only in highest rated instruments), while credit risk funds must invest minimum 65% of total assets in corporate bonds (investment in AA and below rated corporate bonds).
Mutual Funds employ multiple methods to source debt instruments. Government securities are typically sourced from other institutional players, while corporate bonds must be directly sourced.
The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
FAQ Section
What are debt securities and how are they related to mutual funds?
Debt securities, also includes bonds, represent a loan where the borrower pays interest. Mutual funds invest in these debt securities through both the secondary and primary markets. Experienced fund managers, macro specialists, researchers and risk management experts make up the fixed-income fund management teams.
What are the different markets and types of debt instruments?
Debt capital markets include Central Government Securities, State Government Securities, PSU Bonds, State Government Undertaking Bonds Corporate Bonds etc. Money market instruments include Treasury Bills, Certificate of Deposits Commercial Paper etc.
Who dominates the debt capital markets?
Large institutional players, including banks, insurance companies, retirement funds and mutual funds, dominate the debt capital markets. However, a large part of the debt market lacks sufficient liquidity, leading to off-market or negotiated deals, which must be reported to the exchanges.
What are the responsibilities of mutual funds while investing in debt securities?
Mutual funds schemes must follow their stated investment objectives and adhere to various security and group-level exposure limits while investing in debt securities. They must also monitor redemption dates (in case of close ended schemes), replace maturing securities with suitable ones and comply with SEBI’s provisions on categorization and rationalization of schemes.
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Disclaimer
An Investor Education And Awareness Initiative Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. if they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.gov.in. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.
