What should you do when your debt fund falls sharply?

The sharp fall in Net Asset Values (NAVs) of some debt schemes of Taurus Mutual Fund on Wednesday is making some debt mutual fund investors very nervous. The news comes a little over a year after two debt schemes of JP Morgan Mutual Fund faced similar situation following the downgrade of Amtek Auto papers. Obviously, it is time to ask the important question: what should debt mutual fund investors do when faced with similar situation in future?

For late comers, four debt schemes -- Taurus Short Term Income Fund, Taurus Ultra Short Term Bond Fund, Taurus Dynamic Income Fund and Taurus Liquid Fund -- fell 7-12 per cent on Wednesday. The losses in Taurus Mutual Fund’s debt schemes were a result of the downgrade in the credit ratings of Ballarpur Industries Ltd. (BILT). The fund house said it is stopping fresh inflows into the affected schemes for now.

Taurus episode is extremely disturbing because the list also includes a liquid scheme and an ultra short-term scheme. Investors understand that a dynamic bond fund or a short-term fund may take extra risk to enhance returns. However, a liquid and an ultra short-term scheme is not expected to do that. They are considered relatively-safer and least volatile. That are the reasons why many investors use them to park money needed in the short-term.


What should you do?

Coming back to the big question, what should you do when you see that your debt scheme is down by 7 or 12 per cent in a day? Remember, that is the return you can hopefully get from a debt scheme in a year. Well, you have two options. One, get out immediately. But that means you would suffer losses. Two, you can wait for the fund house to come up with some plan and recoup the losses.

"My first advice to investors of these schemes would be to book their losses and get out and look for better opportunities elsewhere," says Dr D Sundararajan, Investment Consultant, Trendy Investments.

If you believe in your fund house and you think it might come up with some plan to recover the losses, you can give it some time. “If you can wait for the scheme to recover and bear the losses till then, you can wait. It depends on how much risk you can take with your money,” says D Sundararajan, Investment Consultant, Trendy Investments.

If you remember, JP Morgan tried to salvage the situation by splitting the fund into two. One with regular investments and another with the downgraded investment. Finally, those who managed to stay with the fund recovered most of the losses. Apart from an official release stopping inflows into the affected funds, Taurus Mutual Fund hasn't said anything about the losses or its future plans. Waquar Naqvi, CEO of the fund house, refused to comment on the issue.