In view of the present scenario, which debt categories should be avoided and why?
- Anonymous
I would say that it is not about which category should be avoided. Of course, you can do without many categories, for example, gilt-fund category, as they require you to proactively get out of them before interest rates go up. But I think of all types of debt funds, you should stay away from those funds that have a meaningful or even modest allocation to anything which is rated AA and below.
Although not all the bonds rated AA and below are bad investments, it is just because Indian bond funds are facing a different kind of crisis. Even if Indian bond funds invest in relatively lower-rated bonds but whenever we see a risk aversion or panic in the market, investors run to take their money out. Now, this causes a big problem. So, it is not that funds are invested in bad bonds; rather, it is investors' behaviour that forces fund managers to redeem their investments in such a hurry that they get stuck and then, those funds get a big hit. Therefore, I would say that keep away from the funds having a larger allocation to lower-rated bonds or a modest allocation relative to peers, as they can face the stampede. Thus, one has to really work towards avoiding a fund that has the potential to face a stampede because stampede is the real risk instead of the credit risk.
This article was originally published on August 13, 2020.
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