Mirae Asset Investment Managers India has launched ‘Mirae Asset Banking and PSU Debt Fund’, an open-ended debt scheme predominantly investing in debt instruments of banks, public sector undertakings, public financial institutions, and municipal bonds.

The new fund offer (NFO) is currently open for subscription and is slated to close on July 20, 2020. The fund will be benchmarked with NIFTY Banking and PSU Debt Index. The scheme will be managed by Mahendra Jajoo, Chief Investment Officer, Fixed Income, of the fund-house. Let us find more about the offering and its place in the Banking and PSU Debt Fund category. Read on.

In vogue

Banking and PSU Debt funds are not very new. Their goal is income generation with moderate risk. But they have reappeared on investors’ radar. At the end of June, the category managed assets worth over Rs 96,000 crore, over 100% growth in 12 months.

Right from the days of IL&FS default, then the DHFL saga and constant turmoil in credit risk funds, debt fund investors have been getting poor investing experience. The last nail in that coffin came from the Franklin Templeton MF debt fund fiasco.

Even debt fund investors who had earlier remained steadfast started looking for safer option. Banking & PSU Debt Funds appeared on the horizon like saviours. These mutual funds invest about 80% of their corpus in debentures, bonds, and certificates of deposit of banks and PSUs. Since the debt securities have high liquidity and high ratings, these funds saw robust inflows.

In the last 6 months, 1 year, 3 year and longer-term periods, Banking & PSU Debt Funds as a category have done quite well. In fact, they are in the top-3 fund categories in the short, medium and long-term. The safety aspect plus decent returns have worked well. Along side, falling bank deposit returns have meant that investors falling in the high tax brackets have an incentive to look for better tax-adjusted returns.

Take a look below at the returns of some popular debt fund categories.

Debt fund category funds

Mirae Asset Banking and PSU Debt Fund

As per the fund-house, this new scheme will predominantly invest in high credit quality papers (mainly AAA rated instruments).

The Mirae Asset Banking and PSU Debt Fund will see dynamically management of portfolio duration to take advantage of interest rate outlook. The fund-house has said that the endeavour will be to maintain a duration of 2-5 years. At present, Banking and PSU Debt Fund peers have average maturity from less than a year (Indiabulls Banking & PSU Debt Fund) to close to 9 years (Edelweiss Banking and PSU Debt Fund). The biggest funds in this category have been 2-5 years average maturity.

The Mirae scheme will endeavour to ensure high portfolio liquidity by investing in Banking & PSU papers (>80%) along with some allocation to Government Securities (G-Secs). Do note that the use of G-secs will be to shift duration, since government securities are long-dated papers.

Fund basic details

The minimum initial investment in the scheme will be Rs 5,000/- and in multiples of 1/- thereafter.

The scheme will re-open for continuous sale and repurchase from July 27, 2020.

The Mirae Asset Banking and PSU Debt Fund will offer the Regular and Direct Plan with Growth and Dividend Option (Payout & Re-investment) to investors.

The fund will have nil exit load, this is mostly in-line with category peers.

This is a new scheme. The expense ratio of category peers range from 0.31% (UTI Banking & PSU Debt Fund) and 0.83% (LIC MF Banking & PSU Debt Fund).

Fund-house speak

“Given the present scenario, investors may wish to increase allocation to relatively safer fixed income portfolios. Mirae Asset Banking and PSU Debt Fund aims to generate income with moderate risk while remaining focused on safety and liquidity. This fund is suitable for investors looking at savings in a debt fund for an investment horizon of 1-2 years,” says Swarup Mohanty, CEO, Mirae Asset Investment Managers (India) Pvt. Ltd.

RupeeIQ take

Banking and PSU Debt Funds are not highly market volatile and so are considered suitable for conservative investors with a low-risk appetite. But, note that these schemes do face risks from the interest rate movement. We have previously seen some funds perform poorly in case of hardening or flattish interest rates, and when yields go up, returns can become negative.

Some Banking and PSU Debt Funds currently follow a ‘roll down’ investment strategy as a tactical approach. This means that ordinarily the average maturity of the scheme’s portfolio is unlikely to increase significantly and may be expected to generally reduce with the passage of time.

Some peers follow partially buy and hold strategy which aims to generate optimum yield with a good credit quality portfolio. This is suitable for investors who are looking to gain from accrual and duration calls by investing in short maturity bonds.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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