What to do when downgrades hit your mutual fund schemes

Several mutual fund schemes suffered mark-to-market loses recently after the downgrade of perpetual bonds issued by IDBI Bank by rating agencies. In February, some schemes of Taurus Mutual Fund were badly hit by downgrading of papers of BILT. JP Morgan Mutual Fund faced rough weather after the downgrade of bonds issued by Amtek Auto. So, what should you do when a downgrade hits your debt mutual fund scheme?

In most cases, experts ask investors to stick to their schemes, even after downgrades. The returns would be hit after the downgrades due to mark-to-market losses. However, experts would like investors to continue with their investments until they hear from the fund house.

“After the loss, pulling out money won’t help you. Investors should wait for the company to come up with a plan,” says Deepali Sen, Founder, Srujan Financial Planners. But this advice is not universal. “This advise holds if your returns are low due to the downgrades. If you are losing your capital, you shouldn’t wait and pull your money out,” Sen adds.

Deepali Sen also believes that investors should try to find how much exposure the scheme has to downgraded instruments. “If the exposure is more than eight per cent, investors need to worry about their money,” Sen adds.

But does that mean you would lose capital if your scheme has a higher exposure to the downgraded instruments? Puneet Oberoi, Founder, Excellent Investment Advisorz, believes it depends on the AMC and the promoter. “A bigger company or AMC can bear the losses better than a smaller fund house. A small fund house like Taurus will transfer the losses to the investors,” says Oberoi. He adds that this is why investors should always opt for schemes from a bigger fund house.