I am stuck with low-performing debt funds. What should I do?
Dhirendra Kumar discusses how to deal with a low-performing debt fund
Jul 23, 2019
I am caught up with some low-performing debt funds. Also, underlying bonds in some of my funds have experienced rating downgrades. What should be my strategy in the current situation?
I would say that don't get out of these funds in a hurry. Even if you have been hit by these funds, all may not be over as there still is a possibility of recovery. Some funds had exposure to bonds, which defaulted on their interest obligations. Consequently, those bonds were downgraded, leaving a negative impact on their valuations. For instance, in reaction to a rating downgrade, something worth Rs 100 might get valued at Rs 80.
Subsequently, the fund company received the interest but with a delay. So, what was payable on Thursday, for example, was received on Monday. Even though the revision in ratings may not happen immediately, values of bond will go up following a revision.
So, even if a bond becomes reasonably good and from a fund's point of view, is likely to get its interest and principal back, it may still be valued low. The main objective of a fund company is that investors should neither be out of pockets nor face any decline in their investments. So, you should wait rather than exiting in a hurry.