Passive Debt Funds
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Passive Debt Funds
Subject : Economy
Section :Money Market
Concept :
Passive Funds
- A passive fund is an investment vehicle that tracks a market index, or a specific market segment, to determine what to invest in.
- Unlike with an active fund, the fund manager does not decide what securities the fund takes on.
- This normally makes passive funds cheaper to invest in than active funds, which require the fund manager to spend time researching and analysing opportunities to invest in.
- Tracker funds, such as ETFs (exchange traded funds) and index funds fall under the banner of passive funds.
Passive debt funds
- Passive debt funds are fixed income mutual fund schemes which track debt or money market instruments.
- These funds invest in debt or money market instruments like Government Securities (Gilts / G-Secs), State Development Loans (SDL), PSU bonds, and Tri Party Repos (TPTs) etc.
- Currently, debt funds in the passive category invest only in AAA-rated instruments.
- The Sebi circular on passive fund introduces norms for each debt fund category, including portfolio exposure limits to each sector, the issuer (based on rating) and group.
- Application of these provisions should help mitigate concentration risk in debt ETFs/ index funds.
What are different types of passive debt funds in India?
- There are mainly three kinds of passive debt funds in India viz. passive liquid funds, passive Gilt funds and target maturity funds.
- Passive liquid funds invest primarily in overnight instruments, while passive Gilt funds invest in Government Securities.
- The vast majority of passive debt funds are target maturity funds.
- Target maturity funds are passive debt mutual fund schemes, which track an underlying bond index and have defined maturity dates. On maturity, you will get the maturity proceeds which will include the face value of the bonds in the fund portfolio and accrued interest.