DSPBR Mutual Fund recently sent out an information email to the investors of its debt funds including DSP BlackRock Money Manager Fund and DSP BlackRock Ultra Short Term Fund. As a result of the SEBI prescribed categorisation, the schemes are undergoing change in fundamental attributes. What should you do as an investor?
What is DSP Blackrock Money Manager Fund?
The DSP BlackRock Money Manager Fund is a debt fund in the Ultra Short Term Fund category. It has been in existence since July 2006.
The investment objective of the scheme is
to seek to generate returns commensurate with risk from a portfolio constituted of money market securities and/or debt securities.
To understand it simply, the fund aims to predominantly invest in instruments with residual maturity of upto 6 months (80%) and others with an residual maturity of over 6 months (20%).
In contrast, a liquid fund’s residual maturity is upto 90 days. An ultra short term fund is expected to carry a little more risk than a liquid fund.
The current Modified Duration of the scheme is 0.34 years and the Average Maturity is 0.38 years.
Post the SEBI circular on rationalisation and categorisation of schemes, the fund proposes to make fundamental changes to comply with SEBI’s guidelines.
What are the proposed changes?
As per the communication by the Mutual Fund:
Currently, the “Type of Scheme” is “An Open-ended Income Scheme”.
It is proposed to be changed to”an open ended ultra-short term debt scheme investing in debt and money market securities such that the Macaulay duration of the portfolio is between 3 months and 6 months.”
As you can see, there is now a clear distinction of the scheme from a liquid fund, which has a Modified Duration of 3 months. The DSP BlackRock Money Manager Fund is the next level of investment in the debt fund segment.
A word about Macaulay Duration (MD)
As you are aware, debt funds in India are marked to market, that is their NAV is determined on a daily basis by using the value of the underlying securities/investments.
In case of debt funds, there is an inverse relationship between interest rates and NAV/price. If interest rates rise, prices fall and vice versa. This relationship is determined through the Macaulay’s Duration, which is calculated mathematically.
In that sense, MD helps you understand the sensitivity of the fund portfolio to changes in interest rates. As Modified Duration goes up, the portfolio sensitivity goes up too. In other words, it means if there is a rise in interest rates, the value of the portfolio will go down and vice versa.
The new debt fund categorisation is based on this concept of MD. For short term investment funds, the defined MD is low and can go up with the term funds. That gives a sharper perspective on the risk the fund is likely to assume.
For further reference, the DSP BlackRock Ultra Short Term Fund, is now being renamed to DSB BlackRock Low Duration Fund. This is in line with the SEBI categorisation guidelines. The fund will invest in securities with residual maturities of 6 to 12 months only.
If we put them on a ladder, here is how the DSPBR debt funds stack up,
- DSP BlackRock Liquidity Fund (residual maturity of upto 90 days)
- DSP BlackRock Money Manager Fund (residual maturity of 91 to 180 days)
- DSP BlackRock Ultra Short Term Fund (to be renamed to DSPBR Low Duration Fund) residual maturity of upto 181 to 360 days)
What should you do?
With the change, the current Modified Duration of the Money Manager Fund is unlikely to change a lot. It is at 0.34 years and might drop a few points. Primarily because there will be no exposure to securities above 6 months residual maturity.
The proposed change comes into effect from Feb 14, 2018. If you are invested in the DSP BlackRock Money Manager Fund and you are not comfortable with this change, you can exit the scheme now.
Please do take into account the capital gains that you might have to pay. In less than 3 years of holding, gains are taxed as short term at the rate of your income tax bracket.
There are no exit loads in the scheme.
In our view, this is no cause for worry. The scheme now acquires a lower risk tone than before.
Here’s the link to the detailed circular from the fund house.
Have questions! Do share with us.