We have recently seen some defaults or similar incidents in debt funds. We are generally advised to invest in short-term debt funds or ultra-short-term/liquid/overnight funds. Further, over the last few days, there have been unusual falls in the NAVs of many short-term debt funds. Given this, is it safe to continue or invest in these funds now?
- Dinesh Bhardwaj
I haven't seen a very significant fall in too many funds. Further, I wouldn't call a fall between 25-50 bps unusual. Having said that, if you have invested in relatively conservative funds, then you may continue with it.
I have forever been of the view that one should not invest in debt funds for the maximisation of returns. Rather, one should invest in equity to achieve that. Right now, the market is extremely risk-averse, many bonds are extremely vulnerable and credit outlook remains difficult. So, I would say this is not the time to get venturesome with your debt investments.
I would say while investing debt funds, be extra cautious and choose a fund that may earn you half-one per cent lower return than the category but rules out the likelihood of a painful default. From that standpoint, I would say that choose conservative short-duration funds.
There are the short-duration funds that of late only have relatively lower or smaller components exposed to lower-rated papers. This is against the backdrop of the recent Franklin accident after which, many funds have become risk-averse and thus are trying to scale down such exposure and preparing great liquidity in their portfolios. So, I don't think there is as much risk today as it was when the crisis happened.
To reiterate, be into relatively safer short-duration debt funds with lower allocation to lower-rated papers.
This article was originally published on August 14, 2020.
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