Debt Fund investment: How risky are Credit Risk Funds and where to invest now

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May 12, 2020 12:01 PM

Once the lockdown ends, one may witness high redemption pressures from corporates which may further put pressure on the mutual fund industry.

 Credit Risk Funds, risk factors, debt mutual funds, investors, goals, interest rateBefore investing in debt mutual funds, investors should understand the interest rate cycle of the economy.

The COVID-19 pandemic has taken its toll not only on the lives of individuals but also on the finances of both individuals and corporates. Liquidity constraints have already put pressure on the debt raised by several companies as servicing them is seemingly becoming difficult for many of them. One immediate impact is seen on debt fund schemes which have invested in the debt securities of corporates. One can have a close look at the Fact Sheet of any debt fund scheme to see the ratings of the debt securities that the fund has invested in.

The taxation structure of debt funds suits those who have their goals at least three years away. Further, debt as an asset class is less volatile than equity, and hence suits preservation of capital with effective post-tax returns better than fixed deposits. But, to choose the right debt mutual fund is a bit tricky as there are 16 debt fund categories for the investors to choose from. Unless the objective and the mandate of each fund is understood and matched with one’s own goal, the investment will not result in the desired outcome.

One of the 16 debt fund categories is the Credit Risk funds that have the SEBI’s mandate to invest a minimum of 65 per cent of total assets in corporate bonds which are below highest-rated instruments.

What makes Credit Risk funds riskier than other debt funds and should one consider investing in them? To get answers to these queries and know more about Credit Risk funds, FE Online got in touch with Amit Jain, Co-founder & CEO, Ashika Wealth Advisors. Here are the excerpts of the e-mail interview.

How to evaluate liquidity, the credit risk profile of debt MF schemes?

Investors should invest in debt mutual fund schemes which have quality debt instruments by understanding the industry dynamics, business model and its financials. As of now, Quality blue-chip bonds or Government securities should be preferred as they are highly liquid.

Is it a good time to invest in credit risk funds or should investors wait?

Investors should not invest in credit risk funds from a medium-term perspective, as a lot of businesses will face challenges to serve their debt obligation if the lockdown extends further. Once the lockdown opens up, we may witness high redemption pressures from corporates which may further put pressure on the mutual fund industry. Investors who need liquidity and safer returns can park their money in arbitrage funds.

What is the risk-return profile of a debt fund? What should an investor know before investing in them?

Before investing in debt mutual funds, investors should understand the interest rate cycle of the economy along with the industry life cycle and business model in which these mutual funds are investing. When the Interest rate cycle is at peak then investors should invest in Duration(G-Sec) mutual funds. When the Interest rate cycle bottoms out, then investors should invest in Accrual (Corporate) mutual funds.

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