Debt Fund FAQs
What are Money Markets and Money Market Instruments?
Money markets allow banks to manage their liquidity as well as provide the Central
Bank means to conduct monetary policy. Money markets are markets for debt instruments
with a maturity up to one year.
The most active part of the money market is the call money market (i.e. market for
overnight and term money between banks and institutions) and the market for repo
transactions. The former is in the form of loans and the latter are sale and buyback
agreements - both are obviously not traded. The main traded instruments are Commercial
Papers (CPs), Certificates of Deposit (CDs) and Treasury Bills (T-Bills).
- Commercial Paper : A Commercial Paper is a short term unsecured
promissory note issued by the raiser of debt to the investor. In India Corporates,
Primary Dealers (PD), Satellite Dealers (SD) and Financial Institutions (FIs) can
issue these notes.
It is generally companies with very good ratings which are active in the CP market,
though RBI permits a minimum credit rating of Crisil-P2. The tenure of CPs can be
anything between 15 days to one year, though the most popular duration is 90 days.
Companies use CPs to save interest costs
- Certificates of Deposit : These are issued by banks in denominations
of Rs 5 lakhs and have maturity ranging from 30 days to 3 years. Banks are allowed
to issue CDs with a maturity of less than one year while financial institutions
are allowed to issue CDs with a maturity of at least one year.
- Treasury Bills : Treasury Bills are instruments issued by RBI at
a discount to the face value and form an integral part of the money market. In India
Treasury Bills are issued in four different maturities - 14 days, 90 days, 182 days
and 364 days.
Apart from the above money market instruments, certain other short-term instruments
are also in vogue with investors. These include short-term corporate debentures,
bills of exchange and promissory notes.
Can the NAV of a Debt Fund fall?
A debt fund invests in fixed-income instruments, where safety of capital and regular
returns are assured. These include Commercial Paper, Certificates of Deposit, debentures
and bonds. While the rate of interest on these instruments stays the same throughout
their tenure, their market value keeps changing, depending on how the interest rates
in the economy move. A debt fund's NAV is the market value of its portfolio holdings
at a given point in time. As interest rates change, so do the market value of fixed-income
instruments - and hence, the NAV of a debt fund. Thus it is a misnomer that the
debt fund's NAV does not fall.