Securitisation and Mutual Funds
What the exam tests
Securitisation and mutual funds tests the mechanics of pooling and tranching, SPVs, credit enhancement, true sale, pass-through structures, and mutual fund NAV, loads, expenses and regulation.
Core rules
- Securitisation transfers receivables to an SPV in a true sale, isolating them from the originator’s bankruptcy. Investors receive cash flows from the pool.
- Tranching allocates losses: senior tranches have priority; subordinated/equity tranches absorb first losses.
- Credit enhancement may be internal (overcollateralisation, excess spread, subordination) or external (guarantee, insurance).
- Mutual fund NAV = (assets − liabilities)/units outstanding, usually computed daily. Entry loads are largely banned in India; exit loads and expense ratios affect investor returns.
- Open-end funds redeem at NAV; closed-end funds trade at market price, which may be at a premium or discount.
Worked example
A ₹200 crore receivables pool has expected losses of 3%. A rating agency requires credit enhancement equal to three times expected losses. Required enhancement = 3 × 6 = ₹18 crore. This can be provided by a subordinated tranche of ₹18 crore, so the senior tranche is ₹182 crore before considering excess spread. If actual losses are ₹10 crore, the subordinated tranche absorbs them first; senior investors are protected up to ₹18 crore.
Traps
Assuming securitisation removes all risk from the originator; ignoring prepayment risk; confusing pass-through and pay-through; using NAV as the market price of a closed-end fund; forgetting exit load when calculating investor return; treating an SPV as a mere accounting device without true-sale legal isolation.