Here are the top three rules which have favored debt mutual funds in recent past that you must know:

Seggregation of portfolio : In the event of credit downgrade the downgraded instrument generally becomes illiquid making it very difficult for the fund manager to dispose of such instruments. In such an event segregation of such an instrument from the main portfolio will prevent the distressed asset(s) damaging the returns generated from more liquid and better-performing assets of the portfolio. Sebi allowed seggregation of debt instruments in case of a credit event in 2018. In August this year, Sebi further allowed mutual funds to side pocket debt in cases where borrowers approach the mutual fund house for debt restructuring due to stress on account of Covid 19. This will prevent investors to invest into a toxic security.

The disclosure of yields of each instrument in the portfolio will help investors to know the quality of the portfolio and understand the level of risk taken by the scheme to a better extent.

Safer liquid funds: In order to improve risk management and ensuring sufficient liquidity, Sebi mandated liquid funds to hold at least 20% of its portfolio in liquid assets like cash, government securities, T-bills and repo on government securities at all the time. This was done after a few liquid funds witnessed a deep fall in their single-day NAVs due to credit crisis.