Since the credit default crisis, debt markets have taken a beating. The Franklin Templeton issue rose on the aftermath of the credit crisis; a hard lesson that a fund’s credit rating is an integral aspect of debt fund investment.

The recent pandemic situation is supposedly going to push the credit line up, which is not a good sign. In the wake of this, risk-averse investors are investing in Banking and PSU debt funds, as they hold higher rated bonds or debt security papers that have the least risk.

Banking and PSU debt funds are mandated to invest in a minimum 80% of its assets in debt instruments of banks, Public Sector Undertakings, and Public Financial Institutions. Hence, fund house Mirae Asset Mutual Fund launched a Mirae Asset Banking & PSU Debt Fund.

The mutual fund house is of the view that based on their framework the fund will be actively managed to ensure high allocation to AAA rated instruments of G-sec, and banking and PSU papers. The fund’s duration will be maintained to 2 to 5 years with use of G-sec to shift duration in an endeavour for high profitable liquidity.

Diagram 1: Investment framework

(Source: Mirae Asset Bankig & PSU Debt Fund’s Market Collateral)

However, this fund is suitable for investors who are willing to take moderate risk and have an investment duration of upto one year.

Table 1: Details of Mirae Asset Banking & PSU Debt Fund (MABPDF)

Type	An open-ended debt scheme predominantly investing in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds.	Category	Banking & PSU Fund
Investment Objective	To generate income / capital appreciation through predominantly investing in debt and money market instruments issued by Banks, Public Sector Undertakings (PSUs) and Public Financial Institutions (PFIs) and Municipal Bonds. The Scheme does not guarantee or assure any returns.
Min. Investment	Rs 5,000 and in multiples of Re 1 thereafter	Face Value	Rs 10 per unit
Plans	Regular* Direct *Default option	Options	Growth* Dividend: Reinvestment* Pay-out *Default option
Entry Load	Nil	Exit Load	Nil
Fund Manager	Mr Mahendra Kumar Jajoo	Benchmark Index	NIFTY Banking and PSU Debt Index
Issue Opens:	08/07/2020	Issue Closes:	20/07/2020

(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, the scheme’s asset allocation will be as under:

Table 2: MAPDF’s Asset Allocation

Instruments	Indicative Allocation (% of total assets)		Risk Profile
	Minimum	Maximum
Debt and Money Market Instruments, issued by Scheduled Commercial Banks, Public Sector Undertakings (PSUs) & Public Financial Institutions (PFIs) and Municipal Bonds	80	100	Low to Medium
Debt (including government securities) and Money Market Instruments issued by entities other than Banks, PFIs, PSUs and Municipal Bonds	0	20	Low to Medium
Units issued by REITs & InvITs	0	10	Low to Medium

• A maximum of 10% of net assets may be deployed in REITs and InvITs and the maximum single issuer exposure may be restricted to 5% of net assets or upto the limits permitted by SEBI from time to time.
• The Scheme may invest in securitised debt upto a maximum of 50% of its net assets.
• The Scheme may invest in Structured Obligations / Credit Enhancements not exceeding 10% of the debt portfolio of the scheme and the group exposure in such instruments shall not exceed 5% of the debt portfolio of the scheme.
• The Scheme may invest in derivatives of fixed income instruments up to a maximum of 50% of its net assets.
• The cumulative gross exposure through debt, money market, units issued by REITs & InvITs and derivative positions should not exceed 100% of the net assets of the Scheme.
• The scheme may participate in repo in corporate debt securities.
• The Scheme may engage in securities lending in accordance with the guidelines issued by SEBI. A maximum of 20% of net assets will be deployed in securities lending and the maximum single counterparty exposure will be restricted to 5% of net assets outstanding at any point of time.
• If permitted by SEBI Regulations, the Scheme may engage in short selling of securities in accordance with the guidelines issued by SEBI.

(Source: Scheme Information Document)

What will be the Investment Strategy?

The Scheme aims to invest in debt and money market instruments issued by entities such as Scheduled Commercial Banks, Public Financial Institutions (PFIs), Public Sector Undertakings (PSUs), and Municipal Bonds, as well as other such bodies.

The Scheme shall endeavour to develop a well-diversified portfolio of debt (including securitised debt) and other instruments. The Scheme may also invest in the schemes of Mutual Funds. The Scheme may also invest in the hybrid securities viz. units of REITs and InvITs for diversification and subject to necessary stipulations by SEBI from time to time.

Though every endeavour will be made to achieve the objective of the Scheme, the AMC / Sponsors / Trustee do not guarantee that the investment objective of the Scheme will be achieved. No guaranteed returns are being offered under the Scheme.

Who will manage Mirae Asset Banking and PSU Debt Fund?

The Mirae Asset Banking and PSU Debt Fund will be managed by Mr Mahendra Kumar Jajoo.

Mr Mahendra Jajoo is the Head of Fixed Income at the Mirae Asset AMC. He has over 27 years of experience in the field of financial services including 13 years of experience in Fixed Income fund management. Mr Jajoo is a Chartered Accountant (CA), Company Secretary (ACS) and Chartered Financial Analyst (CFA)

At  Mirae Asset Mutual Fund, Mr Jajoo is responsible for supervising all the debt schemes of the fund house. Prior to joining the AMC, Mr Jajoo was a Director with AUM Capital Markets Ltd. He has also been associated with organizations like Pramerica Mutual Fund (now known as DHFL Pramerica Mutual Fund), Tata Mutual Fund, ABN AMRO Asset Management Ltd and ICICI Group.

Currently, at Mirae Asset Mutual Fund he co-manages/manages  Mirae Asset Savings Fund, Mirae Asset Cash Management Fund, Mirae Asset Dynamic Bond Fund, Mirae Asset Hybrid Equity Fund (debt portion), Mirae Asset Fixed Maturity Plan – Series III – 1122 days, Mirae Asset Equity Savings Fund (debt portion) and Mirae Asset Arbitrage Fund.

Outlook for Mirae Asset Banking & PSU Debt Fund

Indian fixed income market, one of the largest and most developed in South Asia, is well integrated with the global financial markets. The RBI reviews the monetary policy six times a year, giving guidance to the market on direction of interest rate movement, liquidity, and credit expansion. The central bank has been operating as an independent authority, formulating the policies to maintain price stability and adequate liquidity.

But RBI has successively cut interest rates to boost the waning economy. In the falling interest rate scenario, these funds benefitted from capital appreciation.

Interest rates on small savings schemes and Bank deposits have been on the decline since RBI started reducing policy rates. So if you are willing to take slightly higher risk for higher returns, Banking and PSU funds can be considered as a worthy alternative to these investments.

[Read: Why Banking and PSU Debt Funds Are Grabbing Investors’ Attention]

Do note that while credit risk in this category is low, it is prone to interest rate fluctuation. When interest rates rise, these funds generate lower returns. Interest rate risk associated with debt instruments depends on the macroeconomic environment.

It includes both market price changes due to change in yields as well as coupon reinvestment rate risk. Corporate papers carry higher liquidity risk as compared to gilts due to the depth of the gilt market.

So, Mirae Asset Banking & PSU Debt Fund may be affected, inter alia, by changes in the market conditions, interest rates, trading volumes, settlement periods, and transfer procedure.

This article first appeared on PersonalFN here