Mutual funds bet on banking debt funds

MUMBAI: Asset management companies have started offering banking debt funds to investors averse to taking credit risk on their investment portfolios. Investors have been showing interest in these funds, despite concerns of rising non-performing loans among public sector banks.

Religare Mutual Fund, Principal Mutual and Axis Mutual Fund already have banking debt funds in their portfolios. According to distributors, almost all leading fund houses including Reliance Mutual, ICICI MF and Birla Sun Life are planning to launch bank debt funds over the next few months.

“A banking debt fund is a thematic debt fund designed as a long-term investment solution for debt investors looking for a focused exposure to the well regulated banking industry,” said Sujoy Das, head of fixed income at Religare Mutual Fund.

Banking debt funds take focused exposure to money market and debt issuances of banks and public financial institutions. Banking debt comprises investment in CDs and bank bonds. A bank debt fund or CD fund is launched primarily to take advantage of attractive yields prevalent for bank CDs which are considered to be relatively superior credit as compared to corporate debt.

The benchmark 3-month CD is currently trading at 8.4% PA. Bank debt funds generate ‘liquid fund type returns’ over a one-year period. Liquid funds, as a category, have returned 9.4% over the past one year. Investment in bank debt and money market instruments, treasury bills, government securities and securities issued by Public Financial Institutions is primarily with the intention of maintaining high credit quality and liquidity.