Recently, since the debacle of IL&FS and DHFL defaulting made news headlines, the investors became distraught. And it shattered their delusion of debt investment is safe. Wary investors are cautious with their hard-earned money and losing interest in investing in debt funds.
To prevent this from happening, several fund houses started offering debt schemes that have low risk and will invest in instruments having shorter maturity periods (up to one year).
A money market fund is a category of debt scheme, emerged after the SEBI reclassification, that will invest in Money Market instruments (up to 100 %) having a maturity of up to 1 year. A money market fund generally invests in high quality (credit rating) debt instruments like treasury bills, repurchase agreements, commercial papers or cash equivalents and tax exempting debentures.
They appear attractive, as they are highly liquid, has less risk because they invest in high credit quality instruments, have no exit load and provide better returns than a bank savings account.
Graph: Indicative Risk Return Matrix -Debt Categories
(Source: PersonalFN Research)
On the risk-return spectrum, money market funds are placed between low duration funds and floater funds. Since they usually hold instruments up to one year, may get affected by fluctuations in interest rate. And hence carries a moderately low amount of investment risk.
Hence, they are suitable for investors who are saving for an investment goal of up to one year (house renovation, planning a vacation, etc.), want to build a contingency fund or want to save if unsure about where to invest for a year.
Table 1: NFO Details
|Type||An open-ended debt scheme investing in money market instruments.||Category||Money Market Fund|
To provide reasonable returns,
commensurate with low risk while providing a high level of liquidity, through
investments made in money market instruments. |
There can be no assurance that the investment objective of the scheme will be realized
|Min. Investment||Rs 5,000 and in multiples of Re 1 thereafter||Face Value||Rs 1,000 per unit|
* Default option
|Entry Load||Not Applicable||Exit Load||Nil|
|Fund Manager||Mr Alok Sahoo and Mr Karn Kumar||Benchmark Index||CRISIL Money Market index|
|Issue Opens||June 13, 2019||Issue Closes:||June 18, 2019|
(Source: Scheme Information Document)
How will Baroda Money Market Fund allocate its assets?
Under normal circumstances, the scheme’s asset allocation pattern will be as under:
Table 2: BMMF’s Asset Allocation
|Instruments||Indicative Allocation (% of Total Assets)||Risk Profile|
|Money Market instruments||Up to 100%||Low to Medium|
The Scheme will not have any exposure to debt derivatives, securitized debt, REITs and INViTs and foreign securities.
The AMC shall ensure that the total exposure of the Scheme in a particular sector (excluding investments in Bank CDs, Triparty Repo, G-Secs, T-Bills short term deposits of scheduled commercial banks and AAA rated securities issued by Public Financial Institutions and Public Sector Banks) does not exceed 25% of the net assets of the Scheme. Also, an additional exposure to financial services sector (over and above the existing 25%) not exceeding 15% of the net assets of the Scheme will be allowed by way of increase in exposure to HFCs only, subject to the condition that such securities issued by HFCs are rated AA and above and these HFCs are registered with National Housing Bank (NHB). However, the total investment in HFCs cannot exceed 25% of the net assets of the Scheme.
(Source: Scheme Information Document)
What will be the Investment Strategy?
The Scheme is an open-ended debt scheme that seeks to generate regular income by investing in a portfolio consisting of money market instruments.
The key factors of the investment strategy of the Scheme are:
- Identifying attractive opportunities based on government policies, economic development, monetary policy, research report and overall economic conditions and development.
- The issuer/companies’ selection for investment exposure would be based on financial parameters such as fundamentals of business, quality of management, turnover, financial strength of the company and the key earnings drivers, net worth, Interest coverage ratio, profitability track record and the liquidity of the securities /instruments.
- Issuer/Companies, which meet the initial selection norms, are then evaluated on the financial norms for consideration in the investments.
- The Scheme will emphasize on well managed, with above average growth prospects whose securities can be purchased at a good yield and whose debt securities will be mainly in securities listed as investments grade by a recognised authority like CRISIL, ICRA, CARE etc.
- Investment in sovereign papers would be based on the interest rate expectations arising out of the macroeconomic analysis. This includes analysis of inflation data, & trends in macro variables such as credit growth, liquidity, money supply, fiscal numbers & global interest.
Who will manage the Baroda Money Market Fund?
The Baroda Money Market Fund will be managed by Mr Alok Sahoo and Mr Karn Kumar.
Mr Alok Sahoo is the Head of Fixed Income at Baroda Pioneer Asset Management Company Limited. He is a management graduate in Finance from XIM, Bhubaneswar, with a BE degree from NIT, Rourkela. He has been working in the investment area in asset management for over 18 years. Prior to joining the fund house, he was a fixed income fund manager at UTI Mutual Fund and at HSBC Mutual Fund. He was also the Fund Manager for the Employee Provident Fund at HSBC Asset Management. He has experience in the credit research of companies as well.
Currently, Mr Sahoo manages Baroda Pioneer Treasury Advantage Fund, Baroda Pioneer Short Term Bond Fund, Baroda Gilt Fund, Baroda Pioneer Dynamic Bond Fund, Baroda Pioneer Liquid Fund, Baroda Pioneer Credit Risk Fund, Baroda Ultra Short Duration Fund and Baroda Overnight Fund
Mr Karn Kumar has more than 13 years of work experience in Fixed Income, credit research and corporate finance. Prior to joining the AMC, he has worked with CRISIL Ltd. and ICICI Bank in areas of credit research and structured finance. He has also worked with Sterlite Industries Limited in the Corporate Finance team.
At the fund house, Mr Kumar manages only one scheme, i.e. Baroda Credit Risk Fund.
The outlook for Baroda Money Market Fund:
Money markets in India essentially consist of the call money market (i.e. market for overnight and term money between banks and institutions), reverse repo transactions (temporary purchase with an agreement to sell the securities at a future date at a specified price), Commercial Papers, Certificate of Deposits (CDs issued by the Banks) and Treasury Bills (issued by RBI).
In the money market, activity levels of government and non-government debt vary from time to time. Instruments that comprise a major portion of money market activity include but are not limited to:
• Overnight Rates;
• Triparty Repo;
• Reverse Repo Agreement;
• Treasury Bills;
• Government Securities with a residual maturity of <1 year;
• Commercial Paper;
• Certificate of Deposits.
Apart from these, there are some other options available for short-term investments like MIBOR linked debentures with periodic exit options and other such instruments.
So predominant risks in investing in money market mutual fund include interest rate risk and inflation risk. Any change in the interest rate or monetary policy leads to fluctuations in the rate of debt funds and affect overall yield.
Currently, the 10-yr G-Sec yield eased by good 38 bps in May 2019 and since the 1st bi-monthly monetary policy for 2019-20, by 32 bps. So far in 2019, the benchmark yield is down by 34 bps. As regards the liquidity conditions in the system, after remaining in deficit during April and most of May due to restrained government spending, it turned into an average daily surplus of Rs 660 billion in early June, the RBI observed.
The weighted average call money rate (WACR) remained broadly aligned with the policy repo rate: it traded above the policy repo rate (on an average) by 6 bps in April, but below the policy repo rate by 6 bps in May, the RBI observed.
In the 2nd bi-monthly monetary policy statement for 2019-20 (held in June 2019), the RBI predictably reduced policy rate by another 25 bps, placing the repo rate at 5.75% and consequently the reverse repo rate at 5.50%.
This was the third consecutive reduction in policy in 2019. Plus, the Monetary Policy Committee (MPC) decided to change the stance of monetary policy from neutral to accommodative and it reduces the scope of further reduction in policy rates by the RBI to accommodate growth concerns.
Hence the fate of the fund relies on the short-term money market instruments of varying ratings including unrated debt securities held. Avoid investing aggressively at the longer end of the yield curve,
This article first appeared on PersonalFN here.