What it is?
If you look into your debt fund’s portfolio, you may come across an instrument or a set of instruments called pass-through certificates (PTC). These are essentially loans issued by banks that are bundled off as securities and sold off to buyers such as mutual funds (MF).
How they work?
A PTC is a loan that is issued by a bank to a borrower, usually a company. Since it will take some time to get the money back, the bank sells this loan to an MF at a lower interest rate. The bank pockets the difference as the borrower repays over the loan life.
Why it’s in the news?
When global markets collapsed in 2008 and borrowers found it difficult to repay their loans, some PTCs were in trouble because firms found it difficult to pay timely. When a firm defaults, the firm that has invested in the PTC suffers a loss because of income delays.
The road ahead
After the 2008 credit crisis, most MFs invest in PTCs more carefully by staying with good quality scrips. Funds such as ICICI Prudential Asset Management Co. Ltd make additional disclosures about their PTC exposure.