Taking lessons from the winding up of Franklin debt schemes, the idea of creating a backstop facility for debt funds, a sort of a 'buyer' of last resort, was first mooted in the budget of 2021. SEBI has now implemented it by introducing the Corporate Debt Market Development Fund (CDMDF). Here's all you need to know about it and what it means for debt funds investors.
What is the Corporate Debt Market Development Fund (CDMDF)?
It is an alternative investment fund (AIF), that will act as the last hope (read buyer) during market stress. It will purchase credit-worthy corporate bonds from mutual funds during times of market dislocation.
You can think of CDMDF as a contingency fund - or more like a power fund.
For instance, let's say there's a corporate bond fund - Fund A, and the market is witnessing some stress due to which investors start queuing up to redeem their investments from Fund A. But the fund is finding it difficult to honour the redemptions since it is not able to sell some of its underlying bonds in the market.
Now, in such a situation, Fund A can knock on the doors of this contingency (or power) fund, which will look to buy securities that Fund A can't sell in the market. However, security should be credit-worthy and not a downright defaulted bond.
This way, the contingency fund will help Fund A tide over a temporary liquidity crisis. This is exactly the trouble which Franklin faced back in 2020 when it decided to wind up its six debt funds.
So, such a situation can be averted if a power fund like this is available. It will instil confidence among investors.
Who will fund the CDMDF?
All mutual funds have been mandated to contribute 0.25 per cent of their specified fund's AUM to the CDMDF. This power fund will be accessible to specific mutual funds in proportion to their contributions made to the fund at an AMC level.
The specified schemes include all debt funds (except overnight, gilt and index funds) and conservative hybrid funds.
And recently, AMCs have started releasing notices of such contributions being made in their respective funds' SIDs. At the time of writing this article, about 16 AMCs have come up with addendums to the SIDs. Since this is mandatory, other AMCs will follow suit. We are looking at potentially around Rs 3,000-3,050 crore being contributed to this AIF.
Thus, soon, you will be able to see this as any other underlying holding in a specified fund's portfolio. It will mostly be of high quality (since the power fund would invest its assets in short-term quality securities in normal times).
What's in it for investors?
Overall, it's a good initiative and should prove to be a confidence booster when the debt markets witness turbulence.
The gap between the liquidity promised by open-end debt funds versus the relatively less liquid Indian debt markets (which exacerbates in times of market dislocation) has been a long-standing issue. But, with CDMDF, a concrete step has been taken to bridge this gap to some extent.
Whether it proves effective and adequate enough, only time will tell. But the fund industry would hope that its very presence proves reassuring enough so that a panic-induced liquidity crisis doesn't arise at all.
Also read: SEBI allows fund houses to launch multiple ESG schemes
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