Mutual Fund Dilemma: Should investors stay away from debt funds?

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Updated: Sep 06, 2020 6:02 PM

It is feared that the slow recovery of the Covid-hit Indian economy would result in more bond failures – especially of companies offering luxury items – after the loan moratorium period ends.

mutual fund, MF, debt funds, Franklin Templeton, bond failure, side pocketing, freezing of debt funds, Covid-hit economy, economic recovery, PSU bonds, tax-free bonds, liquid funds, Arbitrage fundsThe freezing of six funds by Franklin Templeton some time back has shaken the confidence of mutual fund investors in debt funds.

The freezing of six funds by Franklin Templeton some time back has shaken the confidence of mutual fund investors in debt funds. While a recent report says four of these funds have turned cash positive after receiving Rs 1,498 crore in the last two weeks, another report says that NAVs of four of the frozen funds fell by 6.32 per cent after Rivaaz Trade Ventures defaulted on its scheduled debt obligations due on August 31.

Apart from the fluctuating fortunes of investors of the six frozen Franklin Templeton funds, it is feared that the slow recovery of the Covid-hit Indian economy would result in more bond failures – especially of companies offering luxury items – after the loan moratorium period ends.

So, what should debt fund investors do to ensure the safety of their hard-earned money?

“Another six months will test the nerves of companies in terms of cash flow. Only those debt-ridden companies who can raise fresh debt at lower costs and reduce their debt service burden will be able to survive. Others will go into trouble,” says Ajay Sharma, Director & Designated Partner, InvestmentMitra Advisors LLP.

“For quite some time we are keeping our investors away from the debt funds, as it is difficult for us to study the balance sheet of individual companies in detail. Last year we put a lot of money into tax-free and other high quality PSU bonds of our HNI clients,” he added.

Apart from PSU and tax-free bonds, which investment avenues should the investors choose at this point of time from a safety point of view?

“At this point of time, investors may opt for overnight and liquid funds for short term liquidity requirements. Arbitrage funds with company deposits of high quality companies like HDFC Ltd and bonds for 1 to 3 years may be another option,” says Sharma.

“We have withdrawn from other debt funds,” he added.

“Also, we are advising those who want to invest for around three years and are ready to take a little risk to have some exposure to peer to peer lending along with balance advantage funds,” Sharma further says.

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