Why mutual funds invest in TREPs? Are TREPs good for mutual funds?

You must have an idea of where equity mutual funds invest and how they earn returns. They sell and purchase equity shares. When share prices rise, equity mutual funds usually tend to gain more. However, debt market functions differently. To put this simply, the debt market is where debt instruments get traded. Debt instruments are those assets that need to make a fixed payment to their holder, often with interest. Important examples of debt instruments include TREPs (tri-party repo), CDs (certificate of deposits), T-bills, bonds, mortgages, repurchase agreements (repo), money market instruments, etc. NBFCs (non-banking finance corporations), banks, corporates, PSUs, and government issue various money market instruments to mitigate their funding requirement over short-term. While you must be aware of most debt instruments like T-bills, bonds, CDs, etc., TREPs in debt mutual funds are one of the newest instruments introduced. Read on to know all about why mutual funds invest in TREPs.

What’s TREP?

TREPs and repo are instruments that are used for providing loans for the short term, say, up to a year or overnight. Repo permits institutions like NBFCs and banks to borrow the required funds by putting up the securities of the government as security or collateral. TREPs facilitate lending and borrowing of funds against collateral of the Indian government securities in Triparty Repo arrangement. It is a repo contract where 3^rd entity (besides lender and borrower) i.e., the tri-party agent serves as intermediary between 2 parties to repo to offer services such as collateral selection, settlement and payment, custody as well as management during the life of CCIL (Clearing Corporation of India ltd.). The Reserve Bank of India (RBI) introduced TREP in India around 2018. The major goal behind introducing TREP was to add liquidity to the corporate bond repo market and to provide markets with an alternate repo instrument.  The different kinds of entities that can participate in TREPs are financial institutions, banks, mutual funds, insurance companies, NBFCs, primary dealers, corporates, pension funds, etc.

Are TREPs good for mutual funds?

Short term debt funds predominantly invest in TREPS as lending under such windows is completely collateralised through the underlying Indian government securities. Basically, variations in yields as per liquidity might not be wide on a specific day. However, there are opportunities to earn higher returns owing to TREP via carefully timed deployment of funds, guided by monitoring of the liquidity trends within system.

Note that, the fund management team usually tracks the performance of the fundby checking parameters like system liquidity, ongoing bond (SDL, G-secs), government bonds nearing term maturities, government spending, GST outflows, etc.

Ending note

TREPs have been introduced to encourage the demand for corporate bonds and offer a boost in liquidity to the debt fund segment of the market. It is a tri party agent or third entity, other than lender and borrower as it serves as intermediary between 2 parties dealing in repo transactions to facilitate trading anonymously, provide services such as collateral selection, settlement and payment, and management during transaction’s life cycle.