The Budget announcements on setting up of a legal framework for mortgage-backed securities, developing the corporate bond market and scrapping stamp duty on commercial papers have opened up a whole lot of investment avenues for mutual funds.

The finance minister said the government would "amend the definition of 'securities' under the Securities Contract Regulation Act 1956 to provide a legal framework for trading in securitised debt, including MBS."

The minister had also said that they would "appoint a high level expert committee on corporate bonds and securitisation to look into the legal, regulatory, tax and market design issues in the development of the corporate bond market."

The removal of stamp duty on CPs will also lower the costs in their issuance and trading, which means more such paper will be available in the market.

At present, the number of floating rate instruments in the market are limited and supply is much lesser than demand. Most floating rate instruments are from a few corporates and what the funds usually do is create synthetic floaters by investing in fixed deposits and swapping that for Mibor-linked instruments in the overnight interest swap market. The position is reversed the next day.

Floating rate schemes also invest in CPs and certificates of deposits, which are similarly swapped to create synthetic floaters.

While setting up the required framework might take some time, industry sources said that allowing MBS to be traded in the market will increase their liquidity.

At present, the Housing Development Finance Corporation [Get Quote], the National Housing Bank and Hudco are among the few institutions that have issued MBS. The first float hit the market in 2002 after the Reserve Bank of India [Get Quote] issued preliminary guidelines.

In fact, a working group set up by the Clearing Corporation of India to study the viability of mortgage-backed and asset-backed securities had recommended listing of such securities after they are rated by an approved agency.