How to go about debt funds in 2020?
Debt fund investors are yet to recover from the consequences of the IL&FS crisis, where some investors are incurring losses via direct investments and some via mutual funds. Investors looking out for investing in debt funds in 2020 should consider the following things:
1. Exposure to low rated bonds
This is one of the things that investors must check in debt funds before investing. Low rated bonds are those, which are below BBB rated. The thing to remember here is that different rating agencies have different ratings. Low rate bonds or papers are risky. Debt funds can invest in them with proper underwriting procedures to generate returns but must not have high exposure to them. Credit risk funds usually have exposure to low rated bonds.
2. Exposure to papers of one issuer
This is more of diversification risk. It is rightly said, "Do not put all eggs in one basket.” This not only applies to stocks and equity funds but also debt funds. So, exposure to papers of a single issuer or even you can say a single group can increase the risk that the funds carry. During the episode of IL&FS, DHFL, Essel group, etc., this was one of the issues which affected debt funds. Hence, before investing, look out for such exposure in a debt fund.
3. Lending against shares
This is also one of the issues that affected the debt funds. This happened specifically in the case of the Essel group, wherein, the shares were pledged against the lending done. The company needs to pledge shares worth 1.5 to 2 times of lending amount and needs to maintain the same. If in case, the same is not maintained, then the lender (here, debt funds) can sell the shares in the market and recover the amount. However, funds with high exposure to such a setup may prove to be risky.
4. Financial/investment plan
Never invest uncertainly. Always have a plan in place; may it be your financial plan or investment plan. Having a plan in place often helps you to understand, which is the best possible investment that suits your requirements. Hence, having a plan in place is highly recommended. This would not just act as a guiding document but also help you to de-risk your capital.