How many debt funds should I have in my portfolio? Is it wise to diversify money into different AMCs for both debt and equity?
- Akash
Absolutely. For investing in equity, one can consider multi-cap or value funds of only a few fund companies, as these investments will get you reasonable diversification. When it comes to debt funds, diversification based on asset management companies (AMCs) holds more importance. This is because things can go drastically wrong here. Also, one should not choose a debt fund only on the basis of its returns.
Any extra return that you get from a debt fund is assuming greater risk. And the risk doesn't visit you every day rather it hits you once in a while. Therefore, it is important to understand the reasons why a fund gave higher returns in the past. If such returns were derived from assuming either credit risk or interest rate risk, then it isn't necessary that the fund will be able to achieve the same in the future. No doubt, there are some funds that have consistently maintained their good performance even after assuming credit risk. Looking at the history and understanding the reasons behind the performance of the fund will definitely help.
In the case of equity funds, we end up accumulating our money for a long period of time by doing SIPs. On the other hand, debt investment normally takes the form of lump-sum investing. For example, what happened in the case of credit risk funds, which witnessed a drastic fall in their net asset values (NAVs) because of DHFL or IL&FS exposure. Some of these funds fell by five to seven per cent. And investors were not prepared for the situation. Such a situation can easily be mitigated by investing in two to three funds.
This article was originally published on July 25, 2019.
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