Supercharge Your Portfolio! MFs Venture into Commercial Papers & Certificate of Deposits.
In order to enhance the development of the mutual fund industry and the corporate bond market, the Securities and Exchange Board of India (SEBI) has granted permission to asset management companies to engage in repurchase agreements (repos) involving Commercial Papers (CPs) and Certificate of Deposits (CDs).
A repo is a financial arrangement where borrowing or lending takes place based on the collateral of a security, such as a bond. In this arrangement, when a security is bought or sold today, it is reversed or unwound on the following day or according to the agreed terms, with the interest rate determined at the time of the transaction.
Furthermore, CPs are short-term debt instruments issued by companies, typically utilized for financing inventories and meeting temporary liabilities. On the other hand, CDs are fixed-income financial instruments regulated by the Reserve Bank of India (RBI) and are issued in a dematerialized form.
Additionally, according to the SEBI circular dated June 8, 2023, the credit rating of the underlying securities shall be considered for repo transactions in various aspects, including the Potential Risk Class (PRC) matrix, liquidity ratios, Risk-o-meter, and others. This implies that the rating assessment will be based on a thorough analysis of the underlying securities.