Are your debt mutual fund investments in trouble?

Debt mutual fund investors are a worried lot these days. The recent spike in bond yields have suddenly woken them up to the risks involved in investing in debt mutual fund schemes. It was shocking news to many conservative investors who recently switched to debt mutual funds for better returns. Some others invested in long-term debt schemes suddenly found out they bought the wrong product, when advisors have started recommending ultra short-term schemes and short-term schemes.

“Many debt investors are confused and in panic right now, especially the long-term investors. We get questions ranging from, ‘where should we invest now’ to ‘we never knew our money was not safe in debt funds’ and that 'you never told us this would happen in debt funds’. All I can say is volatility is a part and parcel of the market and investors should know this,” says Neeraj Chauhan, CEO, The Financial Mall.

The Indian bond yields climbed to their highest in 14 months, crossing the 7 per cent mark, last week amid concerns of rising inflation and higher global oil prices. Moody’s rating upgrade for India brought the benchmark rates down, but the euphoria was short-lived. The benchmark government bond yield plunged 12 basis points to open at 6.94 per cent on the day when the ratings were made public. The benchmark yield dipped 16 basis points on Monday to close at 6.89 per cent after the government cancelled the scheduled sale of bonds via open market operation (OMO).


Also Read: Worried about investments in long-term debt funds? Listen to these advisors
“A lot of investors are in shock because they never anticipated the risk in debt funds. If the investor thought that equity is risky and debt is risk-free, he/she made a mistake. The fact is that debt is less risky than equities but it has its share of volatility,” says Gaurav Monga, a certified financial planner based in Delhi. Neeraj Chauhan believes that there are a lot of debt investors who said they understand risk but they actually did not. “When the investors start investing, we tell them that going for the long-term funds might be riskier, but at that time they thought they can take the risk,” says Neeraj Chauhan.

Gaurav Monga believes that until investors go through a volatile phase, they don’t know their risk-taking ability. “The investors in the long-term bond funds right now would know how much risk they can take. If they do not panic at this time, they were fit for the product, else they chose the wrong product in accordance to their risk appetite. This is all about choosing the product that fits your investment behaviour,” says Monga.

Advisors like Neeraj Chauhan believe that many investors do not realise that debt mutual funds are complex. “Not everyone can understand and make great decisions. The fact that most investors in the debt space are extremely cautious about their money and are risk averse, it is imperative to have an advisor if you are a novice,” advices Neeraj Chauhan.

Monga says investors should go for simple debt schemes with least risk if they do not understand the universe of debt schemes. “Match your investment horizon with the duration of your fund, in case of duration funds. Don’t go for a long-term or medium term bond fund if you need the money after one year, stick to short-term,” says Gaurav Monga.

If you want to know which debt schemes matches your investment horizon, here’s some help: (Know your debt mutual fund schemes better)

Understanding the risk involved is a must before investing in debt schemes. “If you do not know about the specific risks involved in the particular debt schemes, stick to liquid or short-term funds. Don’t eye for returns in gilt, dynamic bonds and long-term funds,” says Neeraj Chauhan.

If you want to invest in accrual strategy schemes like credit opportunity funds, make sure that the scheme is betting on high-quality papers. “It is difficult for investors to know and understand the quality of papers in the portfolio. To minimise this risk, invest in established and credible AMCs,” says Gaurav Monga. Monga adds that investing in established AMCs doesn’t negate the risk, it only minimises it.

Dynamic bond funds have been touted as the best products to bet on the interest rate cycle but advisors believe investors shouldn’t bet on them right now. “Dynamic bond funds rose to fame because they said that an expert fund manager will take the interest rate call. But, when the interest rates are not favourable, the fund manager can’t do anything,” says Neeraj Chauhan.

“We do not advise conservative investors to invest in dynamic bond funds because betting on interest rates is taking an interest rate risk. Even if the fund manager is taking calls, the risk will be taken on the investor’s money,” says Gaurav Monga.