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Debt Funds: Look Before You Leap!

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The campaign from the Association of Mutual Funds in India (AMFI), the industry body of mutual funds, has changed a lot in the last one-and-half year. Earlier, AMFI was stressing on "mutual fund sahi hai", which then changed to “mutual fund for the long term”, now it is all about "mutual fund also invest in fixed income securities". There is nothing wrong with these communications, only the timings of these campaigns seem to be jinxed. Few months after it started the ‘mutual fund sahi hai’ campaign, most of the equity funds where majority of the retail investors invest started giving negative returns. Then it started the 'mutual fund is for the long term' campaign, suggesting that one can use SIP to ride through volatility. After one year, most of the MF investors are seeing their portfolios in the red even if they had used the SIP route. Now, it is focusing on mutual fund also invests in securities other than equity.

This again seems to be ill-timed, as instances of defaults or credit issues relating to some of the renowned companies in the last few months have exposed the risk of investing in debt funds. Therefore, even if debt funds are less risky as compared to equity mutual funds, they are not risk-free and do carry investment risk on them. There are some common warning signals that you need to watch before investing in a debt mutual fund.

First, avoid debt funds with a concentrated portfolio, that is, funds investing in a paper of a single company or a single group. Debt funds with high exposure to low-rated bonds should also be avoided, even if they give better yields. If you invest in a credit risk fund, you should understand the risk it entails. You should also stay away from those debt funds that have large exposure to bonds of those companies whose share price has witnessed a sharp fall. In addition to this, you should also keep a constant watch on holdings of the debt funds and check if any of the issuers is under review from the credit agencies. If so, review your portfolio again. If you follow these principles, investing in a debt fund can be relatively safer, but not risk free.

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