MF queries answered by Prakash Lohana, Ascent Financial

I have invested in a few accrual category of debt funds, such as Tata Short-Term Bond Fund, DSPBR Banking & PSU Fund, and IDFC Corporate Bond Fund. In December, many of them showed negative returns although their portfolios consist of more than 90% AAA-category companies. What may be the reason? Were there any defaults? Also, a few funds, such as Reliance Banking & PSU Debt Fund, have invested in companies like Reliance Jio although these companies neither do any banking business nor are from the public sector. Is it not unfair? PRASAD PARANJAPE
You have selected good funds, and the NAV drop is not because of any defaults. Debt funds primarily have two types of risk: one is credit risk and the other is interest-rate risk. You have selected high-credit debt funds, where a sudden increase or decrease in interest rates affects the NAV. When interest rates increase, an existing fund's NAV is affected based on that fund's yield to maturity and duration of debt instruments it has invested in. Likewise, when interest rates fall, there is a positive impact on the NAV. You should stay invested in these funds. Once interest rates start coming down, you will again see positive returns in these funds.

Funds like Reliance Banking & PSU Debt Fund have the mandate to invest 80 to 100% of their corpus in banking and PSU securities. But, as stated in the offer document, they can also invest up to 20% of their corpus in instruments other than banking and PSU debt funds. This has been done to give fund manager a bit of space to diversify and grab opportunities.

I am a 27-year-old salaried person earning Rs.40,000 net salary. I want to invest my savings into MFs for long term. Also, as a Muslim, I want to avoid debt funds and FDs. So, please suggest good equity linked funds to get better returns on my investment. IMRAN PATHAN
You are starting your investments at early age, which will help you to achieve your goals earlier. I am suggesting you five funds -three large cap and two mid cap -with assumption that your investment horizon is more than 5 years. You can spread your investments equally and preferably invest through SIP. The funds are Franklin India Bluechip Fund and (large cap), ICICI Prudential Focused Bluechip Equity Fund (large cap), Birla Sun Life Top 100 Fund (large cap), Franklin India Prima Fund (mid cap), and HDFC Mid-cap Opportunities Fund (mid cap).

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