1163479 SIP myths you must know!

Tanmay from Jaipur is a seasoned investor before making any investment, he weighs it on the scales of risk and profit. You can beat Tanmay with only one thing and that is logic. Even if someone asks for advice from him, he replies with logic.

For example, Bhavesh asked him to suggest any form of investment that’s without risk. Tanmay asks him to get an FD,  but of not more than Rs 5 lakh because in case the bank collpases, his 5 lakhs will be safe. He advises Bhavesh that even if he wants to get an FD of more than Rs 5 lakh, then divide it into two banks.

Today, Tanmay’s son Tarun is trying to explain to him that there is almost no risk in debt funds just like FDs. On hearing this, Tanmay’s eyes welled up with blood. This is because he remembers how during Covid there was a run on one of Franklin Templeton’s debt funds.

But Tarun too wasn’t behind in giving the best of his logic.

He asks his father, if the bank collapses then how does he get the FD money? Tanmay says that insurance comes in handy in times of crisis. Tarun asks him that would he believe it, if he tells him about a fund which will come in handy when debt funds are in trouble? Now Tanmay is shocked and asks Tarun what does it mean?

Well Tarun was talking about Corporate Debt Market Development Fund i.e. CDMDF. This fund has been brought to grasp the wavering trust of investors like Tanmay.

This fund comes to the rescue in times of crisis by giving money to one debt fund and will also promote business by increasing cash in the debt market.  This fund will be formed from the money given by mutual fund companies.

This simply means that all the companies will create a fund by putting a little money and if there is a problem, take relief from it. Initially, companies will put in around Rs 3,000 crore for CDMDF and Rs 30,000 crore will be received from the Government’s Guarantee Fund for Corporate Debt ie GFCD. That is, a total fund of Rs 33,000 crore will be created and it will work like a closed-ended fund with a tenure of 15 years. Close ended funds are those funds in which money cannot be invested after a certain time.

Mutual fund schemes are required to invest up to 25 basis points (BPS) of their Assets Under Management (AUM) in CDMDF units. These do not include Gilt funds and overnight funds but include conservative hybrid funds.

The first contribution of these mutual funds will be based on their AUM as on 31st December 2022 as per the norms framed by SEBI. First half yearly contribution will start from December 2023. If the Asset Management Company (AMC) does not pay within the given time, then they will have to pay 15 percent interest. The AMC will also have to pay a one-time contribution of 2 percent of the AUM of fixed debt oriented mutual fund schemes.

Now let’s get to know how this initiative will further help the investors?
Well, debt funds that invest in debt securities like bonds and debentures are a safe investment tool for people who do not want to take risk. However, liquidity has been a challenge for these funds, i.e when you go to sell your units there may not be any buyer. This is especially seen in India’s corporate debt security market.

When liquidity is low during a crisis, investors quickly sell their mutual fund units, in which case the crisis can deepen due to the illiquid market. There is a great possibility of a similar crisis arising even during high inflation and low investor confidence. There are also limits on the Reserve Bank opening special liquidity windows for mutual funds to sell their investment grade securities during a crisis.

Sandeep Bagla, CEO, Trust MF, says the CDMDF will be the last resort for lending to mutual funds and help them meet redemptions at a time when there is little or no secondary market liquidity in the corporate bond market. Mutual funds will now have an emergency fund that will help them in case they don’t find another buyer and provide relief in very difficult market situations.

Well, after hearing all this, it is expected that people like Tanmay will increase on their trust on debt funds as more big institutions will invest in debt mutual funds, which will improve the liquidity in these funds.