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How to understand the portfolio composition of a debt mutual fund?

This article teaches you how to read the portfolio disclosure statement of a debt mutual fund to understand what the fund invests in and the risk-return characteristics.

How to understand the portfolio composition of a debt mutual fund?


23 Oct 2022 - Contact Sayan Sircar
9 mins read

This article teaches you how to read the portfolio disclosure statement of a debt mutual fund to understand what the fund invests in and the risk-return characteristics.

How to understand the portfolio composition of a debt mutual fund?

Table of Contents

Why should you analyse the portfolio of a debt mutual fund?

Debt as an asset class is trickier to analyse and understand as compared to equity. Investing in debt mutual funds requires understanding bond-specific concepts (like duration and yield) as well as risks like credit, liquidity and interest rate risk. Debt funds require frequent monitoring via portfolio disclosure statements published every fortnight. At the very least, forward returns are determined by the current portfolio parameters like duration and YTM vs. return history. This is a point many investors, especially those who compare returns of FDs with debt MF, commonly miss.

There are three things to keep in mind when choosing a debt fund:

• what is allowed to be in the portfolio: this is defined and regulated by SEBI and is covered in our introductory article on debt funds

• what is currently in the portfolio: you will get this information by reading the portfolio disclosure statement of the fund as we cover in this article

• what is the history of changes in the portfolio: this analysis indicates how the fund manager is staying within the SEBI parameters while simultaneously maximising return/risk opportunities

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What is a debt fund portfolio disclosure statement?

Fund portfolio disclosure statements are documents published by the mutual fund AMC at least once a month. The statement shows what the fund is currently invested in, what is the proportion of investments in each asset, the benchmark used and the risk profile of the portfolio.

When are debt fund portfolio disclosure statements published?

As per SEBI regulation, debt fund portfolio disclosure statements are published by the AMC every fortnight. The AMC sends notifications to each investor by email and also uploads them to its website.

Why do AMCs need to disclose their mutual fund portfolios?

AMCs need to disclose their mutual fund portfolios to be in compliance with SEBI Circular no. SEBI/HO/IMD/DF3/CIR/P/2020/130 dated July 22, 2020, SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/555 dated April 29, 2021 and SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/621 dated August 31, 2021.


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What is the format used to declare mutual fund portfolios?

(click to open in a new tab)
debt mf portfolio disclosure

AMCs generally disclose the mutual fund portfolios in Excel format on their website

How to understand the different sections of the statement?

Using an example of a money-market debt fund, here are the explanations for the various sections:

Section 1: Portfolio composition

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Debt fund portfolio disclosure - portfolio composition

We describe each field below:

  • ISIN Number: Unique identifier for each bond in the portfolio. The ISIN column is also used to group the different categories of bonds in the portfolio like Certificate of Deposits, Commercial Paper etc.
  • Name of the Instrument: Name of the bond which contains the issuer’s name. In many cases, the name has the maturity date of the bond as well
  • Credit Rating: This is extremely important information about the credit rating of the bond. Higher the credit rating, the lower the chances of the issuer of the bond not paying back the money. A1+ or AAA is the highest rating value. SOVEREIGN indicates bond issues by the Government of India and is the safest in terms of returning your money
  • Quantity: The number of bonds in the portfolio
  • Market Value (including accrued interest, if any) (Rs. in Lakhs): This is the value of the position
  • % to Net Assets: This is the position as a percentage of the total fund assets. If a fund has 5 lakhs in Bond A and 20 lakhs in Bond B, then the % figure of A = 5/25 = 20%
  • YTM: Yield to maturity of the bond. This figure is an indication of the total return from that bond from today until the maturity date of the bond. As each bond matures, they are replaced by equivalent bonds

Section 2: Plan details and dividends

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Debt fund portfolio disclosure - portfolio notes

The notes provide some useful information:

  • NAV change in the last six months: this is self-explanatory
  • Dividends declared in the last six months: we maintain our stance that mutual fund dividends are tax-inefficient (since they are taxed at slab) and therefore unnecessary. Investors should choose the Growth plan instead of IDCW: Do not make this mistake when investing in mutual funds
  • average maturity: this is the weighted average of the bond maturities in the portfolio. As per SEBI regulations, the mutual fund has to maintain the average maturity within certain limits. However, astute readers will appreciate that extreme values are not well represented in the average. A fund with 10% in a 10-year bond and the rest in a 6-month bond will have an average maturity of 0.1 * 10 + 0.9 * 0.5 = 1.45. This is misleading since in the case of a credit event in the 10-year bond, 10% of the portfolio will be locked in, as a segregated portfolio, until that bond is sold
  • fair valuation/deviation from outside parties: in case the portfolio holds bonds that are not traded regularly, it is difficult to know their right price. Without this price, the NAV of the fund cannot be published. Sometimes external agencies may provide this information. It is generally advisable, unless there is an explicit need, to stay away from funds that hold illiquid bonds

Section 3: Benchmark and risk-o-meter

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Debt fund portfolio disclosure - portfolio risk-o-meter

The risk-o-meter is a SEBI innovation that shows the risk of the fund using a 6-point scale from Low to Very High. While this metric is useful to some investors, others should, in the absence of quantitative risk classification data, use this data solely for checking for changes in risk. If the risk-o-meter value has suddenly changed, it could be a cause for concern.

This section also contains the portfolio benchmark information and the risk-o-meter values of the benchmark(s). Investors should track that the fund risk-o-meter is the same as that of the benchmark.

Section 4: SEBI Potential Risk Class matrix

SEBI on Jun 07, 2021, amended the regulations for the classification of debt funds to better allow investors to understand the risks when choosing one. These new classifications are effective since December 2021. As per the new SEBI criteria, risk in debt funds is classified on Credit risk and Interest Rate risk. These risks are combined into a matrix called the Potential Risk Class matrix.

Read more on this concept here:

How to use the SEBI Potential Risk Class matrix to understand risk in debt mutual funds?

Use cases for understanding the portfolio disclosure

Estimation of 1-year forward returns from YTM

Estimated return from the debt fund in 1 year: (YTM - TER) - D * ChangeInRates

where ChangeInRates > 0 for increases in rates and TER is the expense ratio of the fund. The minus sign in front of D signifies that the return falls when rates rise and vice versa.

For some typical numbers,

YTM = 4%, TER = 0.2%, D = 0.16, Change = .5%,

expected return = 4 - 0.2 - 0.16 * .5 = 3.72% in 1 year before taxes.

Being comfortable with the credit quality

One of the most useful features of the portfolio disclosure statement is that it lists every bond in the portfolio that includes the maturity date, credit quality and overall exposure of the portfolio to a particular company, group of companies or issuer. This list gives the investor an opportunity to look for cases where:

  • there is excessive exposure to issuers that you are not comfortable with
  • the credit profile of the bonds is not to your liking. This is important in categories like short-term debt funds which are defined in the terms of average maturity while leaving the credit quality of the portfolio at the complete discretion of the fund manager
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This post titled How to understand the portfolio composition of a debt mutual fund? first appeared on 23 Oct 2022 at https://arthgyaan.com


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