The backstop facility provided for debt mutual fund scheme will provide a much-needed safety net even as the cost for investors will go up marginally.

Nearly four months after it was announced, SEBI has set the framework for 15-year close-ended Corporate Debt Market Development Fund, a corpus that will buy debt securities from mutual fund houses in times of crisis.

Excluding gilt and overnight funds, all open-ended debt schemes will invest 25 bps (basis points) of their debt AUM in the units of CDMDF. The contribution to the schemes will increase every six months depending on the rise in AUM.

The fund will charge an expense of 15 bps plus taxes. In times of market stress, the charge goes up to 20 bps plus taxes. Expenses include brokerages and clearing charges.

In normal circumstances, CDMDF will invest only in short-duration government securities, treasury bills, tri-party repo on government securities and guaranteed corporate bond repo with maturity not exceeding seven days.

The FT fiasco

SEBI has started working on a backstop for debt mutual fund after the Covid crisis forced Franklin Templeton India to shut six of its debt schemes abruptly due to liquidity crisis in the debt market in 2020. Subsequently, the fund house paid back investors over two years by selling its assets.

Akshat Garg, Senior Manager Research, Choice Wealth (a Mutual Fund Distributors), said Franklin fiasco serves as one of the forces behind SEBI’s continuous push for rigorous regulations and infrastructure in the ecosystem of the securities market.

The fact that the primary goal of debt funds is never to grow capital through hazardous bets serves as a helpful reality check for the fund managers of the AMCs to prevent them from diving below BBB for returns. Of late, AMCs have become more conservative and certain funds may have a very small share of BBB-rated assets, he added.

The expense charged will be an additional burden for retail investor, but it will benefit them particularly when debt investment is gaining ground as an asset class among retail investors to achieve short-term goals, said Garg.

Sonam Chandwani, Managing Partner, KS Legal & Associates, said the expense charged on investors needs to be transparent and detailed in the scheme’s prospectus. This apart, investors should be informed about all possible risks and costs associated with their investments, said Chandwani.

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