Investors should be cautious when switching from liquid to corporate bond funds and keep these points in mind
Returns from liquid funds have been falling for quite some time now. Given that the low-interest regime will continue for quite some time as indicated by RBI monetary policy, is it the right time to switch from liquid to corporate bond funds?
- Ravi Gupta
Yes, but only if you think that you are capable of choosing a corporate bond fund that invests in the highest quality corporate debt. This is because corporate debt funds are exposed to other problems, including credit risks. Further, the economic outlook still looks grim in a sense that some companies are still defaulting and therefore, funds are suffering. A few weeks ago, Future Group defaulted on its principal and interest obligations.
Investors may not lose money but things are a little cloudy right now. Many good businesses with good cash flows may suffer as their cash-flow situation can actually deteriorate from here on. Having said that, I don't think it's overly risky but mutual funds face an additional risk when many investors turn up to take their money out and that stampede hurts other investors. So, I would say one should be extremely careful while investing in corporate bond funds and invest only in the funds that have top-rated underlying. And this is also meant for long-term debt fund investors so that you can stay and recover your money if you get stuck with a small part of it.