Indiabulls Banking & PSU Debt Fund: Should You Bank On It? - Outside View by PersonalFN

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Indiabulls Banking & PSU Debt Fund: Should You Bank On It?
May 7, 2019

Indiabulls Mutual Fund is out with a new open-ended debt scheme, Indiabulls Banking & PSU Debt Fund (IBPDF). This fund will invest predominantly invest in debt instruments of banks, public sector undertakings, public financial institutions and municipal bonds.

A banking and PSU fund is a category of debt mutual fund that emerged after the SEBI's recategorization norms that will invest a minimum 80% of its assets in debt instruments of banks, PSUs, and PFIs.

IBPDF will invest within the prescribed limits and may allocate some portion to debt and money market instruments issued by other entities, government securities issued by central and state government and units issued by REITs and InvITs.

Usually, this type of fund invests primarily in the bank certificate of deposits or bonds and debentures of public entities that are 'AAA' rated, are comparatively less risky than bonds which are AA rated. And are good investment options, as market-related volatility is relatively lower than long-duration funds.

After several major corporates defaulting, debt funds investment was losing its sheen and making investors aware that debt fund investment isn't risk-free. Indiabulls sought this as an opportunity to offer Indiabulls Banking & PSU Debt Fund as the risk is less and will try to generate returns higher than bank fixed deposits for a short to medium duration of investment, i.e. 3 to 5 years.

[Read: Are You Holding Debt Mutual Funds With Stressed Assets?]

Table 1: NFO Details
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 Debt Fund
Investment Objective To generate income over short to medium term horizon through investments in debt and money market instruments of various maturities, consisting predominantly of securities issued by entities such as Banks, Public Sector Undertakings (PSUs) and Public Financial Institutions (PFIs).

However, there can be no assurance that the investment objective of the scheme will be achieved. The Scheme(s) does not assure or guarantee any returns.
Min. Investment Rs 500 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
  • Regular
  • Direct*
*Default option
  • Growth*
  • Dividend
    • Reinvestment Facility*
    • Pay-out Facility
    • Sweep Facility
*Default option
Entry Load Nil Exit Load If redeemed/switched
  • On or before 3 days of subscription: 0.25%
  • Post completion of 3 days: Nil
Fund Manager Mr Vikrant Mehta Benchmark Index CRISIL Banking and PSU Debt Index
Issue Opens: April 25, 2019 Issue Closes: May 09, 2019
(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: IBPDF's Asset Allocation
Instruments Indicative Allocation
(% of Total Assets)
Minimum - Maximum
Risk Profile
(High/ Medium/ Low)
Debt and Money Market Instruments issued by Banks, Public Sector Undertakings (PSUs) and Public Financial Institutions (PFIs) & Municipal Bonds 80% to 100% Low to Medium
Debt and Money Market Instruments issued by other entities; Government Securities issued by Central & State Government 0% to 20% Low to Medium
Units issued by REITs and InvITs 0% to 10% Low to Medium
  • securitized debt cumulative allocation not to exceed 25% of the net assets of the Scheme (excluding foreign securitized debt).
  • The Scheme may use derivatives for such purposes as may be permitted by the Regulations, including for the purpose of hedging and portfolio balancing, based on the opportunities available and subject to guidelines issued by SEBI from time to time. The Scheme may also use fixed income derivative instruments subject to the guidelines as may be issued by SEBI and RBI and for such purposes as may be permitted from time to time. Investments in Derivatives shall strictly follow SEBI Circular No. Cir/ IMD/ DF/ 11/ 2010 dated August 18, 2010.
  • Total of investments in debt securities, money market instruments, Units issued by REITs and InvITs and gross cumulative exposure in derivatives shall not exceed 100% of the net assets of the Scheme.
  • The Scheme may invest in derivatives up to 50% of the net assets of the Scheme for the purpose of hedging and portfolio balancing purposes in accordance with conditions as may be stipulated by SEBI/RBI from time to time.
  • The Scheme may invest in repo/ reverse repo in corporate debt securities/Government Debt Securities up to 10% of the net assets of the Scheme.
  • The Scheme may also engage in securities lending/ borrowing. The AMC shall comply with all reporting requirements and the Trustee shall carry out a periodic review as required by SEBI guidelines.

    The Investment Manager will apply the following limits, should it desire to engage in Securities lending:
    • Not more than 20% of the net assets of the Scheme can generally be deployed in securities lending; and
    • Not more than 5% of the net assets of the Scheme can generally be deployed in securities lending to any single counterparty.
  • The Scheme does not propose to engage in credit default swaps or make investments in equity-linked debentures.
  • The Scheme proposes to engage in short selling against the borrowed securities as per Securities Lending & Borrowing (SLB) scheme as defined under the framework of 'Securities Lending Scheme, 1997' of SEBI specified vide Circular No. SMD/POLICY/SL/CIR-09/97 dated May 7, 1997. The Scheme does not propose to engage in naked short selling.
(Source: Scheme Information Document)

What will be the Investment Strategy?

The Fund Manager would seek to enhance returns by trading on the shape of the yield curve in the short to the medium time frame and on the differentiated premia offered by the market to different issuers of debt. But it must be understood that there would be a trade-off in terms of their respective liquidity.

As the Funds objective to maximize returns without compromising on safety and liquidity, the portfolio would be constructed with a judicious mix of instruments issued by the universe of eligible issuers across the spectrum.

Portfolio maturity is determined after analysing the macroeconomic environment including;

  • future course of system liquidity,
  • interest rates and
  • inflation along with other considerations in the economy and markets.

The Investment Strategy would be a combination of Top Down and Bottom Up approach for investments.

The Top Down approach would entail the study of:

  1. The current state of the economy
  2. The current inflationary trends in the economy and the resultant effect on yields and interest rate movement in the debt market
  3. The liquidity flows in the system

These studies would help the Fund Manager in determining the duration call one has to take to construct the portfolio.

The Bottom-up approach:

The scheme would also adopt a bottom-up approach for identifying investment opportunities in individual companies. Some of the key points while choosing a company would include:

  • Management evaluation;
  • Corporate governance;
  • Industry analysis;
  • Business analysis;
  • Past track record;
  • Future plans;
  • Projections;
  • Expected returns and
  • Valuations

Based on the above approaches, a Debt Investment Universe would be constructed. This would be the base for portfolio construction. Sovereign Debt i.e. Central Govt. Securities and State Govt. Securities would also be part of the investment universe. Investment in them would take place in accordance with the scheme's objectives.

As a result, the Fund stands to expose to market risk which can get captured partially by "mark to market component" thereby inducing potential daily volatility. Also, the Fund might have a mix of credits with moderately higher credit risk. The Fund will always aim at controlling risk by carrying a rigorous credit evaluation of the instruments proposed to be invested in.

Who will manage the Indiabulls Banking & PSU Debt Fund?

Mr Vikrant Mehta shall be managing the Indiabulls Banking & PSU Debt Fund.

Mr Mehta is an M.S. in Engineering and a CFA from The Institute of Chartered Financial Analysts of India. He has an experience of more than 24 years in fixed income and emerging markets across fund management, macro research, trading and sales.

Prior to joining Indiabulls AMC, Mr Mehta worked with PineBridge Investments, where he was the Head of Fixed Income at PineBridge India AMC. Subsequently, he was a sovereign rate and currency specialist for Asia, in his role as an Asian sovereign analyst with PineBridge. His other work assignments have been with NVS Brokerage, JM Morgan Stanley and Mata Securities.

The outlook for Indiabulls Banking & PSU Debt Fund

As mentioned earlier IBPDF is exposed to market risk, credit risk and interest rate risk as investment in Debt and Money Market Instruments is subject to price, credit, and interest rate risk. The Scheme may be affected, inter alia, by changes in the market conditions, interest rates, trading volumes, settlement periods and transfer procedure.

The fund manager will endeavour to manage credit risk through in-house credit analysis. Diversification and hedging will also be used for portfolio rebalancing purpose as a risk mitigation strategy to reduce the impact of undue market volatility on the Scheme's portfolio.

Currently, most of the major public and private banks are coping with the Non-performing assets (NPAs) and reporting losses owing to the default by many big corporates (IL&FS, Essel group, Anil Dhirubhai Ambani Group) and its subsidiaries.

Plus, it has been reported, that several fund houses had taken an exposure to these companies that have been downgraded to 'D' rating. Note that similar funds of the category do take an exposure to debt instruments which are below AAA rating to clock higher returns that involves high risk.

Investing aggressively at the longer end of the yield curve could prove imprudent and risky in the foreseeable future. Hence investing in short-term debt funds (shorter maturity papers) is more lucrative.

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Author: Aditi Murkute

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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3 Responses to "Indiabulls Banking & PSU Debt Fund: Should You Bank On It?"

Nitin Mehta

May 8, 2019

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Sunil Badhe

May 8, 2019

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May 7, 2019

Nice to meet you.

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