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Did You Know | Offer documents of closed-end debt funds to disclose information on investments

Did You Know | Offer documents of closed-end debt funds to disclose information on investments
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First Published: Thu, Aug 04 2011. 09 34 PM IST
Updated: Thu, Aug 04 2011. 09 34 PM IST
Fixed maturity plans and debt funds are not allowed to indicate returns they may generate, leaving investors clueless about whether it is worth investing in a scheme. But a recent circular issued by the capital markets regulator, the Securities and Exchange Board of India (Sebi), would help you make a fair estimate of the returns.
Sebi has mandated all closed-end debt fund schemes to disclose a range of information in their offer documents they file with the regulator for approval. The idea is to enable individuals take informed decisions.
Details disclosed
All fund houses will disclose the methodology they adopt for evaluating debt securities and the types of instruments in which the scheme would be investing. So a scheme would need to specify upfront whether it will invest only in certificates of deposit (CDs) or commercial papers (CPs) and treasury bills or a combination of these and others.
Also, fund houses will necessarily have to provide the tentative percentage allocation in various instruments, in accordance to their ratings. For instance, a particular scheme may invest 80% of its portfolio in “AAA” rated CDs or CPs or other instruments and 20% in instruments with “A” rating. This information needs to be mentioned on the offer document.
How will this information help?
Such information will give you a broad sense about a particular scheme and help decide whether the scheme suits your investment profile or not. For instance, if a particular closed-end scheme mentions that it would invest close to 80% of the corpus in “AAA” rated securities, it indicates that the scheme carries very little risk compared with a scheme that may mainly invest in “BBB” rated securities. While the former will yield less returns than the latter, the risk in the latter is much higher due to low rating. If you are willing to take high risk for high returns, the second scheme will suit you.
Can the information change?
A scheme needs to invest in accordance with the information it provides in the offer document. Any deviation in the investment mandate can happen only if it is approved by Sebi. Also, when doing this, the scheme needs to provide an exit option to existing investors without charging any load.
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First Published: Thu, Aug 04 2011. 09 34 PM IST