What are banking debt funds?

Religare Mutual recently launched an open-ended debt scheme Religare Bank Debt Fund. Earlier this year, Axis Mutual had released a similar scheme. A few other fund houses are also reported to launch similar products. So what are these funds and how suitable are they?

Banking debt funds simply seeks to invest a majority of their assets in instruments issued by banks. For instance, Religare Bank Debt Fund will invest 80-100 per cent in debt and money market instruments issued by banks and can invest up to 20 per cent in other short-term debt instruments. Since these are short-term instruments with maturity ranging from overnight to a maximum of 90 days, their average portfolio maturity is expected to be about 15 days.

But in the case of Axis Banking Fund, the average maturity may extend a bit more to about 6 months.

Simply put, these funds are for the short-to-medium term. Since they primarily invest in instruments issued by banks, their credit quality can be expected to be high. These funds are suitable for investors who have a time horizon of upto a year and who value reasonable safety as against high returns. While the yields of most bank instruments – treasury bills and certificates of deposits remain over 8 per cent given the tight liquidity scenario, this may ease when interest rates see a marked decline. That means, you may not always enjoy a high return in these funds.

This, again, is true of other short-term debt funds.

So are these funds novel? Not necessarily. A number of short-term debt funds invest a chunk of their money in money market instruments and short-term debt of banks. In this aspect, banking debt funds are not new fangled themes. But as these funds seek to invest a majority of their assets only in bank instruments, they have perhaps been coined as ‘banking debt funds’. A large proportion invested in banking debt may also lend credibility given the higher rating that most bank instruments enjoy.