Many investors have started asking questions to continue in debt funds after the recent trouble in several debt MFs lead by Franklin. In last 1 year about 22 companies held by mutual funds defaulted. IL & FS,DHFL, Reliance ADAG and yes bank contributed to bulk of these defaults. Credit Risk funds & Medium Duration funds were the major ones to take this hit. In select cases even Short term & liquid funds gave negative returns.
Does this mean you should stop investing / withdraw from debt funds?
No, there are plenty of opportunities in debt funds if the categories and schemes are chosen carefully.
Not All debt funds are bad. There are total of 16 debt fund categories and it requires careful consideration over which debt fund category suits you.
Let’s focus on select debt fund categories that have good potential to meet or beat the bank FD returns at relatively less risk.
1.Corporate Bond Funds: You may notice, of all debt fund categories, only Corporate Bond Funds have a mandate on high credit rating . In corporate bond funds, more than 80 per cent of the portfolio has to be invested in securities rated AA+ / AAA. All other debt fund categories need not necessarily maintain high % of AAA securities & it is open to what is mentioned in the AMC scheme documents , namely Scheme Information Document (SID) and the AMC fund manager’s decision. Less than 1% of securities have negative outlook in this category. Also, majority of the funds in this category are currently giving returns well above bank FD’s.
2.Banking & PSU Funds: These funds have a minimum 80% investment in debt instruments of banks, Public Sector Undertakings, and Public Financial Institutions. These are relatively safer and returns are likely to be above bank FD’s as less than 2% of the securities held by them have negative outlook.
3.Liquid & Overnight Funds: Overnight securities have maturity of 1 day & liquid funds upto 91 days. Returns on these funds tend to fluctuate less when compared with other funds. These are the safest among all debt funds. However, the returns are likely to be in line with your savings bank account. If you don’t have an account in a bank that does not give a return of about 5% then you may consider this category, for parking your money for a very time. You may also consider Liquid/Overnight MF’s that offer instant redemption to serve your emergency needs better and choose funds that have overall high Tbill percentage.
4.GILT Funds : Multiple rate cuts by RBI in last 6 months led to a steep fall in bond yields .This in turn gave a big boost to the NAVs of long-term debt funds, such as GILT funds. Hence, majority of GILT funds have given about 16% returns in last 1 year.
Those who assume they have invested in safe govt bonds would be shocked to see that returns on the GILT funds can swing plus or minus 5% within a span of 2 weeks.
However, long-term SIPs in gilt funds have been quite productive in the past and have given good returns. You should expect returns inline with current YTM of the GILT MF.
Also, returns through tactical allocation based on 6 & 12 months moving average, of bond PE has beaten the SIP approach.
Its very important to take help of a Financial advisor while making ANY investments in GILT funds as they are more difficult to understand.
Diversification is the essence of your debt portfolio management. It is advisable to diversify your debt portfolio across different categories of debt MF’s based on your risk profile, liquidity needs & investment horizon. While choosing the debt MF our suggestion is to choose funds that have100% AAA rated papers & Sovereign/ RBI Bonds from Govt of India, until overall economic situation improves further.
Its very important to understand the investment philosophy, read scheme related document carefully and periodically go over the holdings of the debt mutual funds.