Friday, April 24, 2020

WHAT ARE OVERNIGHT FUNDS ?- Mutual Fund , Debt Funds Category Query

Franklin Templeton AMC Declaring to close 6 Schemes from immediate effect has resulted in lot of queries coming in and major TWO-
( For particular which funds and detail on Franklin Templeton click on link below given at the end, ONLY Once you have read this article, which will help you understand it better )

A- How do various Debt funds differ ? 
B- What is Overnight fund and how is it different ?

It's always my pleasure to spread this awareness at anytime ,especially in these disturbing times in the larger Investor Interest.



I would like to avoid to explain this in technical terms.

In Common mans language, Giving money to someone for a predefined fixed term,against interest and assurity of repayment at end of the pre-defined term.
Simply, put, as example,I lend Rs.1,00,000 to Mr.Sudhir, for 18 months, in return will receive Rs.8200 per month and at end of 18 months will receive 1 Lac Back  ( regular income )
another example- I give Rs.100000 to Mr.Raj for 18 months , in return will receive NO Income , but Rs.113000 at the end of 18 months

Exactly this happens in Debt mutual Fund, only thing is they collect money of all amounts ( as low as Rs.5000 ) ,collect money from multiple investors and lend to many companies, banks etc., and inturn earn interest either regularly or at maturity.
( Very Simple way , Ofcourse it is much more than this, but this could be first step to understand debt mutual funds ) ( Some other day, other article will be shared later , not today )


To Start with please have a good look at the different DEBT Fund Categories available to invest in India across all the mutual Funds- ( Have tried and put in as simple words as possible )

 I request you to go thru' the above list fully.
NOW there are certain Common threads how these differ and on those basis SEBI has also divided whole of DEBT Funds in to 16 Categories and mandated Fund Houses to keep and maintain there funds accordingly

ALL of these funds have been divided on following Criteria largely and common factors between 16 categories, upon which it has been named and divided-

A_ Duration of Papers/Bonds which the Fund can buy
For example Government Bonds of 10 year maturity is generally bought by GILT Funds with fixed term and Interest rates, and there are 1 night funds lend which falls under Overnight category AND 91 days in Liquid categories.That is were the fund names are termed as Duration or Term , which means term of investment ).IT's simply the time horizon for which you can and intend to hold the investment, like we all do in FDs .In Simple terms, it can also be defined as how early or how much time there will be or will not be the Liquidity of the funds invested

B_Entities restrictions from which they can but the Papers / Bonds
For example Corporate Bond Fund Specifically buys majorly Corporate Bonds , which means the fund can or will hold Bonds of maximum pvt companies and listed companies, while Banking Fund will only hold bonds ONLY from Banks 

C_ Risk 
There are certain Funds which will hold maximum % of their holdings in AA and even below rating Papers,but it may offer higher interest ,at the same time Default on Capital and /or Interest pyt is high, while certain funds are only mandated to buy AAA ( Highest rating ) Bonds only, where risk on Capital default and/or interest default is near to zero

D_Duration Timing ( Or Diversified Duration )
These are specifically constituted to take Interest rate Directional calls and the fund manager is given flexibility by the Investor while choosing these funds to take Interest rate Directional calls and buy on investors behalf mix portfolio in terms of Term or Maturity time of the Papers.In Simple terms, A Investor may choose to buy 15 days FD and a 5 year bond by himself/herself, similarly , the Fund manager here buys across maturity term and ratings as well.Generally fund manager chooses here papers as per interest rate cycles

Any Investor and/or Advisor is understood to filter and decide on Investment in one of the 16 categories, largely after understanding INVESTORS NEED and RISK PROFILE and Matching the same with the categories available


In these disturbing times when actually investors are getting mixed calls and thoughts and hearing and exploring on the options.While exploring options, and the Franklin news, in last 24 hrs or less, I have received lot of queries on this particular category of DEBT FUND

WELL HOW IT IS DIFFERENT, I think I have largely explained the same in above question and response. It differs in terms of Paper the fund holds.

SEBI defines overnight funds as open-ended schemes investing in overnight securities; ones that have a maturity period of 1 day. They have a very short investment horizon, these schemes are not impacted by interest rate changes and defaults in securities and are supposed to be the safest among the debt mutual fund categories



Unexpected announcement of winding down of six credit risk funds by Franklin Templeton (FT) has created lot of anxiety as reflected in your messages and calls.

From Kotak Mutual Fund we would like to assure our investors, as under:
  • Debt Funds can be broadly divided in two categories - Credit Risk Funds and Non Credit Risk Funds. Liquidity, Maturity profile and Credit quality for Non Credit Risk Funds which constitutes ~ 92.42 % of our debt AUM as on April 22, 2020 is substantially superior to credit risk funds. We expect these funds across entire Mutual Fund Industry to continue their normal operation without any material impact.
  • Banking liquidity in excess of Rs 450,000 crore, Long Term Repo Operations ( LTRO ), expectations of further rate cuts and Operation Twist by the RBI is likely to keep bond market liquid and normally functioning in current challenging times. Credit Risk Funds can be broadly categorized between high risk- high return- relatively illiquid concentrated funds and low risk- low return- relatively liquid- diversified funds. Both Funds have differing Risk Return as well as liquidity profile. Our Credit Risk Funds which is ~ 7.58 % of our debt AUM as on April 22,2020 are managed conservatively on credit side with sufficient liquidity to manage expected redemptions and contingencies.
  • We recommend you to consider portfolio quality as well as liquidity profile of our credit funds to determine weather we are capable of continuing normal operations in current challenging times. We are sure that you will be able to notice the portfolio credit quality and liquidity profile. 

The six funds are Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund.

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