In the current scenario debt funds are like oasis in the desert
The world is saying that the Indian economic trend is weak. The International Monetary Fund indicated that the expected growth is at 6.1%. This is the latest news. Earlier, the growth rate was above 8% and now it has weakened to around 6. These statistics will not benefit investment in stock or stock-based mutual funds. Alternatively, if we look at bank deposits, the interest rates are low. The RBI is keeping this at a low value to boost economic growth but reduced interest rates in the bank deposits is a deterrent for investors. Meantime, stories about Maharashtra PMC bank are daunting investors even in their dreams. What is the way out for investors to get decent returns for their investments? Mutual funds debt schemes is the only answer, but there is no guarantee that it is always beneficial. Mutual fund debts are also having their story of bad times. Some debt funds NAV’s are oscillating like their equity counterparts. Some schemes are extended beyond maturity date because of non-receipt of principle from borrowers. Few schemes have written-off part of their principles. There is problem everywhere. What is the way for investors to overcome these problems? In these desert-like situations, the oasis is selective debt schemes in mutual fund space which are not caught in the storm. Let us elaborate on how to choose these debt funds which are not in the storm and which are likely to sail safe.
Selection of debt funds based on SEBI category:
There are currently more than ten debt funds as per sebi category. All these 10 schemes are not suitable for the current environment. The best way is to avoid credit risk funds altogether. The name itself says that they are having inherent credit risk, which is not suitable for current environment. The next question may be where to invest? Investment in the Banking and PSU debt can be beneficial in the current juncture. These schemes invest only in banking and government institutions. That is why in the last 6 months, scheme AUM of credit risk is dwindling and at the same time, the investment in banking and PSU is increasing.
Risks in debt funds:
There are two risks in debt funds. The first one is credit risk and the other is interest rate risk. We must be very careful when choosing debt schemes. We must choose high credit quality with low interest rate risk. If you do not have this info, you can ask your Financial Advisor or get it from morningstar.in or valueresarchonline.com. See the next image to understand this better. This information is for IDFC Low Duration Fund
The world is saying that the Indian economic trend is weak. The International Monetary Fund indicated that the expected growth is at 6.1%. This is the latest news. Earlier, the growth rate was above 8% and now it has weakened to around 6. These statistics will not benefit investment in stock or stock-based mutual funds. Alternatively, if we look at bank deposits, the interest rates are low. The RBI is keeping this at a low value to boost economic growth but reduced interest rates in the bank deposits is a deterrent for investors. Meantime, stories about Maharashtra PMC bank are daunting investors even in their dreams. What is the way out for investors to get decent returns for their investments? Mutual funds debt schemes is the only answer, but there is no guarantee that it is always beneficial. Mutual fund debts are also having their story of bad times. Some debt funds NAV’s are oscillating like their equity counterparts. Some schemes are extended beyond maturity date because of non-receipt of principle from borrowers. Few schemes have written-off part of their principles. There is problem everywhere. What is the way for investors to overcome these problems? In these desert-like situations, the oasis is selective debt schemes in mutual fund space which are not caught in the storm. Let us elaborate on how to choose these debt funds which are not in the storm and which are likely to sail safe.
Selection of debt funds based on SEBI category:
There are currently more than ten debt funds as per sebi category. All these 10 schemes are not suitable for the current environment. The best way is to avoid credit risk funds altogether. The name itself says that they are having inherent credit risk, which is not suitable for current environment. The next question may be where to invest? Investment in the Banking and PSU debt can be beneficial in the current juncture. These schemes invest only in banking and government institutions. That is why in the last 6 months, scheme AUM of credit risk is dwindling and at the same time, the investment in banking and PSU is increasing.
Risks in debt funds:
There are two risks in debt funds. The first one is credit risk and the other is interest rate risk. We must be very careful when choosing debt schemes. We must choose high credit quality with low interest rate risk. If you do not have this info, you can ask your Financial Advisor or get it from morningstar.in or valueresarchonline.com. See the next image to understand this better. This information is for IDFC Low Duration Fund
Credit quality and investment:
For 2 debt schemes, the above picture may be identical, but its quality can vary. For example, both schemes could have invested in AAA papers of companies. Depending on the quality of those companies, the scheme’s qualities will change. Based on the available information, choose schemes having invested in good quality paper. Avoid schemes having troubled papers and those that are holding potential/likely candidates for troubles in the days to come.
Key points to consider:
- Y. T. M: Before September 2018, we had invested by seeing higher yield to Maturity values (YTM). It is risky to use the same formula now. It is necessary to look at the quality and reliability of the investment as mentioned above.
- Size of the AUM: For debt schemes we must closely monitor or review last one year's scheme AUM. If it is consistent or increasing, indications are positive and then we can go ahead and invest in those schemes. If the scheme AUM is consistently dropping, it indicates that they are holding troubled papers. It is a sure sign for avoiding those schemes.
- Diversified Folio: The plan we invest in should have invested in more number of companies. The scheme investment should not be concentrated to contain losses in the case of defaults. Hence it is always better to choose schemes which has diverse folios than concentrated folios.
- Executive talent: In the last one-year, storm in the debt markets have exposed the efficiency and inefficiency of the fund managers who managed debt portfolios. It is now time to understand debt fund managers capability and track their records. If found good, we can go ahead and invest in schemes managed by them.
In a nutshell, it is time to dig deep before investing in debt schemes, understand the nitty gritty of debt portfolio, fund manager capabilities, credit qualities and interest rate risk they carry.
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