How can an investor stay protected from any further debt-related eventuality?

During this tough time of Covid-19, a number of companies are defaulting. Given this, what is your view on low-duration and ultra-short-term funds? Since many of these funds have invested in NBFCs debt, how can investors safeguard themselves from any eventuality in this regard?
- Virender

There are two aspects to it. The first aspect is the likelihood of the companies - where the fund has invested in- defaulting on the repayment of interest and principal. And the second aspect is that when many investors pull out of debt funds, it ultimately results in a crisis for the funds. This is because most of the time, we don't have a very active debt market for the corporate debt - bonds of companies where these funds invest in. And this is one of the biggest risks emerging now. Since a large number of investors are withdrawing money out of fear, there are no buyers for them.

Despite such large withdrawals, funds have been able to honour and find a market for nearly Rs 15,000-20,000-crore worth of redemptions so far. This has also made debt an opportunity as well as a threat. The risk is that many investors are so fearful that they start pulling out and your fund can face a lot of problems. The other side is that debt has become very attractive but right now, it is not worth taking that bait of attractiveness, especially when it comes to the corporate debt. If your fund has substantial corporate debt allocation and it's your only debt investment, then pull out of it and invest your money elsewhere. There are other debt funds which are much safer.

Further, I think India is a fixed-income country and most people looking for higher yield have been moving their money to debt funds from fixed deposits. But I feel you should lower your expectations of higher yield from funds and turn conservative. We have been of the view that you should take all risk with your long-term money in equity investments, as equity markets can reward you with superior inflation-beating returns.

Try and be more conservative because when you face a decline in your fixed-income funds, a substantial amount of money gets lost. I would say that short-duration or liquid funds should dominate individual investors' fixed-income allocation as of now.

This article was originally published on May 22, 2020.