Double whammy for debt fund investors: Flat rate cycle, tighter regulation

A flat interest rate cycle and tighter regulation may weigh on returns

The Franklin Templeton India (FT) debacle in April 2020 triggered changes to debt-fund structures. Apart from holding the Kudvas guilty of insider trading, Sebi said the six FT schemes which folded up took high risks in buying bonds rated AA or less, and also that the Macaulay duration of portfolios was manipulated.

Sebi tightened the classification and introduced a new risk matrix. Under a 16-category classification, debt funds must maintain Macaulay Duration in the stipulated duration, and hold around 80 per cent of portfolio in instruments of the mandated class, or classes. In addition, from December, debt schemes must rate