Debt Mutual fund- All you wanted to know!!
In the current times of market, one set of people (not necessarily
investor or advisor) are knowing lot about the current situation (these are
active social media users) who give and take unsolicited advise! These advises
may or not may not be relevant to the investor’s goal/objective/ profile. They are
not even responsible for their views/comments/judgement.
Another set of Investors who seek to make sense out of the
flood of information and seek relevant guidance. This blog is for them. If you
get the right perspective (not saying social media doesn’t give right
perspective or guidance but it does keep investor guessing), you are more
confident.
Let me attempt to demystify all of them. If I missed
something, do call me at 9833778887 and I will demystify.
1) Debt Mutual funds are risky? - All
mutual funds are risky when compared to Bank deposits!! In Mutual funds, there
are substitute to Bank Balance, FDs (long term and short term). There are also
mutual fund schemes which are aggressive in nature which aims to deliver much
better returns than conventional FDs/ other Mutual funds. These funds are sophisticated
product and should be considered by novice Investors or novice advisors. Others
must stay satisfied with FD + returns. Extra returns at very high risk is not a
good trade.
2) Credit risk funds are to be avoided,
always? – Every product has place in asset allocation and has relevance
to stage of market. Since last 6- 7 yrs, Indian banking system was struggling
with NPA issues which means there was reasonable amount of pressure in economy.
It was no brainer to avoid credit risk funds in such times!! Many so called
alpha generator Investors and advisors thought to outsmart the market and took aggressive
calls in credit risk funds. They are the one’s in most pain currently. Can Investor
consider credit risk fund at this junction? I feel yes but in staggered manner
as the risk is not fully priced in yet. More volatility can come. If you can
live with volatility in short term and know that these are high risk product,
you can go for it. Before considering credit risk funds, your basket should already
have low risk stable fund.
3) All Categories are risky? Mutual funds schemes have wide array of
products with average maturity of 1 day to 15 yrs. There are schemes with only
Government securities (G-Sec), G- Sec and AAA rated papers, G-sec and Banking
and PSU papers, Mix of Investment grade papers (credit rating from highest to
lowest). So painting entire debt mutual funds segment with negative color is
not appropriate. Will keep detailed understanding of debt schemes for some
other day!
4) My Hybrid funds are also risky?- Risk
to the extent of debt volatility to the debt portion of your hybrid fund will be
present. It depends on what kind of debt papers are part of your hybrid portfolio!!
Also the percentage allocation to risky papers and the liquidity in your
portfolio. Quickly check the underlying portfolio and look for elephant in the
room.
5) Debt issue will lead to equity
correction also? – The companies which defaults or having liquidity
issue due to lockdown and future business outlook will continue to be on receiving
side. They will have to correct significantly from current levels also. But
while this happens, good quality companies with low debt, high cash and better
business outlook will receive premium valuation also. Again, can’t paint with
same brush. But one thing to note – When there will another debt crisis, equity
market will also present volatility.
6) How can Government or RBI help? Government and RBI has obliged only by way of reducing
the Interest rate, increasing the liquidity, financing and taking moratorium route
etc. Trust me much of it will not solve the problem. Government and RBI will
have to create Junk bond purchase program or something similar to that. If the
company are not able to service their obligations due to lockdown and economic
downturn, the NPAs will only rise. Since there is moratorium, it will be recognised
at later months but they may turn NPA. All depends on when does India opens up
fully, 2nd wave of COVID 19 and how soon the economy comes on track.
I
never believed in taking risk in Debt allocation so carefully selected schemes
which doesn’t invests in low quality papers. Even in Hybrid and Arbitrage funds,
the selection criteria was same. I want reassure our Investors that their existing
investment is quite safer from credit risk stand point and I am watchful of any
development affecting your investments.
In case you are stuck on what to do and how to do? Please feel free to
speak to me on 9833778887 or write to me at wealthcarein@gmail.com. I
will be happy to help you without obligation.
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comment
Author –
Bhavesh
D Damania
Founder and Chief Cake Taker - Wealthcare Investments
EduPrenuer,
TV show panellist and Blogger
"Risk comes until you know what, where and why you are Investing”
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