Most of the mutual fund houses provide a bouquet of schemes in the debt category, ranging from liquid funds to conservative overnight funds. Note that ultra-short duration, liquid, low duration, and money market debt funds have considerably low return and low risk profiles. However, specific schemes in such categories take additional risk by investing a specific part of their assets under management (AUM) in papers rated as AA or even below. However, in case you are an ultra-conservative investor, you may not want to take any credit risk. In such a case, overnight debt mutual fund investment may be considered.

Overnight fund often generates moderate returns with relatively higher liquidity and are usually preferred over savings account, arbitrage, and liquid mutual funds. Overnight debt mutual funds invest majorly in TREPs (tri party repos), which is a secured kind of overnight lending. Owing to the security provided by TREPs, credit and interest rate risk is mitigated in debt funds. Read on below to understand what TREPs in mutual fund is.

What is a TREP?

TREPs (Tri party repo) endow the relevant fillip to the corporate bonds’ demand and offer a liquidity boost to the segment of debt. Note that here in this contract tri-party agent or third entity, other than lender and borrower, serve as intermediary for the 2 parties dealing in repo transaction. The National Stock Exchange acts as a tri party agent and, via an online web-based podium, facilitates trading anonymously, and even offers services such as settlement and payment, security selection, management, and custody during the transaction’s life cycle.

In the case of debt funds, TREPs are a short-term debt instrument. Participants in TREPs may lend and borrow for the short-term using corporate bonds and government securities as underlying securities. Overnight debt fund participates as a lender in TREP. Overnight debt mutual funds hold low credit risk as default risk in the case of TREP transaction is extremely low. Counterparty risk in short term debt fund is minimal, too. Underlying securities are often G-secs. As such transactions mature in a day, they also cut the interest rate risks.

What are the objectives of a TREP?

TREPs were started around 2018 post-CBLO (collateralised borrowing & lending obligation) was discontinued. CBLO was a product introduced by the CCIL (Clearing Corporation of India ltd.) in around 2003 to offer an alternative instrument for short-term management of liquidity for market participants who were phased out on call money market. The main goal of introducing TREPs was to add in liquidity to corporate bond market, to offer the market with alternate repo instruments. Distinct types of entities that participate in TREPs are mutual funds, financial institutions, banks, NBFCs, insurance companies, corporates, primary dealers, pension funds, corporate, etc.

Ending note

TREPs are a debt instrument where short-term debt mutual funds investment are made. They facilitate lending as well as borrowing of funds against collateral of government securities in triparty repo arrangements. Repo contract is where the 3rd entity known as the tri-party agent serves as intermediary between 2 parties. This is done to facilitate services such as payment and settlement, collateral selection, management, and custody during the life cycle of the transaction.

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