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Saturday, October 06, 2018

Share Market falls :Caution Required in Debt Mutual fund Investments

Share Market falls
Caution Required in 
Debt Mutual fund Investments

by Mr. Meenakshi Sundaram Kannan,
Mutual Fund Expert, Chennai.

Indian Market fall

Mumbai Stock Exchange (BSE)’s Sensex moved from 38896 to 36227.

Nearly 3000 points drop within a month.

Equity mutual fund and equity investors are impacted by this fall.

The important truth is Debt Mutual Fund is also not doing well in the last one year.

Whenever there is a market crash, what comes to everyone's mind is Bombay Stock Exchange or National Stock Exchange. But only very few understand there is also another market available for exchanging debt instruments.

That is Debt Market. This market is also undergoing turmoil recently.
See the table given below. 

Morningstar Category
Category Average
Top Performer
Bottom Performer
10 yr Government Bond
Banking & PSU
Corporate Bond
Credit Risk
Dynamic Bond
Floating Rate
Government Bond
Long Duration
Low Duration
Medium Duration
Medium to Long Duration
Money Market
Short Duration
Ultra Short Duration

Most of the debt funds under different categories are not doing well and their one-year return is below the bank deposits rates.

It comes as an absolute shock to the investor who moved from bank deposits to debt mutual funds.  Let’s understand what exactly is happening for debt mutual fund investors. 

Debt Markets are in turmoil - The trigger

Recently DSP mutual fund, to improve their liquidity sold their Debt instruments of DHFL in the market at Deep discount. This created panic in the equity market as well as debt market. On that day DHFL share lost more than 50% and their NCD are now quoting at Discount to their face value. 

So, what are the reasons for the Debt market NAV’s poor performance? Let’s first understand the basic factors affecting debt instruments. In contrast to the popular belief that debt funds are completely safe, debt instruments are affected by 2 or 3 major risk factors. They are credit risk, interest rate risk and liquidity risk

1.          Credit risk is associated with mostly corporate lendings. When corporate is unable to pay interest or principal or both to the lender, the lender loses the money. This risk is always there, and it is very high with respect to corporate bonds and NCD’s.

2.          Interest Rate risk originates due to Government of India/Reserve Bank of India increasing or decreasing interest rate which will affect 10 year Government of India bonds and other Government of India bonds. 

3.          Liquidity risk is where we are not able to sell or buy debt instruments at the desired price in the required time. 
All these risks affect debt instruments performance. Because of IL&FS fiasco, whoever invested in their debt instruments got affected.

Debt mutual funds having IL&FS or its group debt papers got a major blow in their NAV.  

It is very clear that in the last one year Government of India 10 year bond yield moved from 6.8% to 8.05% .

 The price of a bond is inversely proportional to the interest rate, hence when the interest rate rises most of the long duration scheme funds get affected because of the drop-in bond prices.

Due to the IL & FS fiasco most investors who invested in ILFS, started redeeming their holdings, which created liquidity crunch with mutual funds. This has created DSP to force sell DHFL papers at deep discount, creating panic as mentioned earlier. This episode created panic in market and market is hammering all NBFC in turn.

In the current scenario, mutual fund investor should understand debt investment is also subject to market risk. As per SEBI classification, debt fund category Which is  called corporate risk fund, credit risk fund etc are taking undue credit risk.

Investor should understand this and invest in this fund only if it is acceptable to the credit risk. Do not lure into these funds because of better return points. Slight increase in return comes with loads of credit risk.

In the entire episode of market fall, DHFL NCD, whose face value is Rs 1000 is quoting around Rs 900 - 950, giving good yield. Those who are confident that DHFL will do well in future and will not default can buy this NCD in market. Contrary investing - those who are unsure and want to stay away from financials, keep distance and not to enter this space and invest only liquid or ultra-short term funds.

About the author

Mr. Meenakshi sundaram Kannan is financial Consultant for 20+ years. Provide unbiased quality investment advice. Passionate writer & teacher.

Share Market falls :Caution Required in Debt Mutual fund Investments Reviewed by Investment Guru on October 06, 2018 Rating: 5 Share Market falls :  Caution Required in  Debt Mutual fund Investments by Mr. Meenakshi Sundaram Kannan, Mutual Fund Expert, C...

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