A debt fund is a fund that invests in securities with a fixed interest rate and has a maturity period. The basic motive of investment in a debt fund is to earn a regular income and capital appreciation.
Basically, debt funds invest in fixed interest, generating securities like government securities, treasury bills, commercial paper. corporate bonds and other money market instruments.
Due to current market conditions and uncertainties, there has been an increasing threat among investors regarding their mutual fund investments.
Mostly debt mutual fund investors are highly concerned about their investments.
You must be wondering, why the investors are so worried, that too regarding their debt fund which in itself is a safer option to choose.
This is because debt mutual funds have investments of over Rs. 8,000 crore in the troubled Essel Group Company. The current happening in the Essel Group has made the investors doubt their investments.
Till now, there are no defaults and the intention of the promoters are also to repay the debt. So, the situation isn’t that bad.
Moreover, investors should understand that even in the worst scenario, if a default happens, then the returns will not turn negative. The simple reason is that the exposure is not high.
The exposure of Rs. 8,000 crore may appear large to you because it is a whole number. If you look at the investment in percentage terms, then it turns out to be 1.2% of the total corpus of these debt mutual funds.
As the exposure is relatively small, there is nothing to panic.
Even mutual fund advisors are of the view that if the default happens, the exposure isn’t that much to drag down the returns to the negative territory.
If you are still on panic mode, then you should consider re-checking your risk profile.
Moreover, this is something you should check before investing in the fund. You should carefully understand the risk involved in the schemes at the time of investing. There will be up and down movements in the credit risk funds.
Similarly, there will also be upgrades and downgrades in the bond funds, as these are too market linked. You should be prepared to sail through the risk while choosing to invest in the same.
Now, what are the alternatives available to shift from your current debt funds?
When the liquid mutual fund schemes got hit by the IL&FS crisis, then many mutual fund advisors told the investors to shift to overnight funds if they didn’t want to take any risk.
Lliquid mutual fund is a category of debt mutual fund that invests in money market instruments like treasury bills, commercial papers, certificate of deposits, etc.
The low maturity period of these funds help the fund managers in meeting the redemption demand of the investors.
After knowing what liquid fund is, it can be considered to be the safest mutual fund option. So, when it got affected by the downgrades of the market, investors were shocked. Then, many advisors asked those investors to shift to overnight funds.
An overnight mutual fund is a type of liquid mutual fund which invests in overnight instruments with maturity of 1 day. So, it is considered as the safest option by the mutual fund advisors for investors who don’t want to take any risk, be it interest rate risk or credit risk.
But definitely, the returns are compromised in the process. It is a new category of debt fund introduced by Securities Exchange Board of India (SEBI) in the re-categorization process last year.
Many mutual fund houses have been lining up to launch overnight funds. Since November 2018, eight mutual fund houses have filed a draft to SEBI for the launch of the overnight fund.
However, things will not remain the same every time. Volatility should not be the reason for you to change your investment strategy.
You should look at your average returns before planning to change. The market will be filled with ups and downs, so you should give your investment an appropriate time to generate the target returns.
Don’t jump to change your investment, without actually knowing how much your returns are affected with the current market condition. Before compromising on your returns by shifting to the safest option you should understand the risk of your investment properly.
You can consider changing your investment strategy if you are investing for a medium or short duration of time. But, if you are investing for a long period of time, then you can wait, as the market will change sooner or later.
Disclaimer: The views expressed in this post are that of the author and not those of Groww