If you are an equity investor, you might have heard experts often citing "quality" as the basis of investments. But what about debt funds? Does the same rule apply to them as well? Answer: YES!
Most of the equity investors’ portfolios are down by over 30 percent thanks to persistent selling by foreign investors, over a month-long lockdown that has halted economic activity and a shutdown of plants across India and globe which could have major implications on June and September quarterly earnings.
In short, stock prices across the board have taken a beating. Liquidity is not an issue with largecap names but could be a concern in stocks that remain fairly illiquid that are mostly small or midcaps.
A similar problem of liquidity hit Franklin Templeton AMC which decided to wind up 6 of its fixed-income funds which had a collective AUM of nearly Rs 30,000 crore. The decision to wind up schemes has shaken the debt MF industry.
Experts feel that sticking to "Quality" is what will get you through tough times, and advised investing in funds or schemes that do not take excessive risks.
“The decision by Franklin Templeton to voluntarily wind up six of their debt funds has shaken up the debt mutual fund industry. This coming after a series of NAV write-downs/segregation by various fund houses due to downgrades/defaults by investee companies will not do any good for the risk-on sentiments of retail and HNI investors,” Deepak Jasani, Head Of Research, HDFC Securities told Moneycontrol.
“This episode once again highlights the weakness in the secondary debt markets in India as they tend to get illiquid by small bouts of micro and macro negative news. Despite the categorisation by SEBI, a lot of debt schemes take on risks that are not reflected in their scheme's risk-o-meter or their category names,” he said.
Fund managers with a view of generating higher returns, tend to take higher risks in the portion of other investments permitted in even safe low-risk categories, say experts. In crisis situations, any portfolio with exposure to credit risk debt instruments have a risk of liquidity and will be adversely impacted.
COVID-19 turned out to be the worst nightmare for equity as well as debt fund investors. At a time when most of the economists are factoring in a near-zero growth rate for the economy – stocks, as well as debt funds, will take a hit or face redemption pressure as investors try and raise cash.
Franklin Templeton was not able to funds these redemptions and therefore winded up 6 schemes under redemption pressure, now as and when the money is realised the same will be credited to the unitholders.
“Debt funds are dominated by corporates and HNIs from the investment side and most of the corporates due to COVID-19 lockdown have liquidity issues and are therefore aggressively redeeming debt mutual funds to meet cash requirements,” Omkeshwar Singh, Head- RankMF, Samco Securities told Moneycontrol.
“Retail Investors should be Prudent while investing in debt funds and should always look ONLY for the quality of the portfolio and should completely ignore past performance, big names and big brands while making investments,” he said.
Another brokerage firm, Sharekhan, in a note, advised investors to be safe rather than sorry, and adopt a conservative approach. Such unprecedented incidents underline the advantage of adopting a conservative approach to invest in fixed income products.
“The philosophy is followed rigorously by us in terms of focus on the quality of paper and exposure to troubled sectors,” it said.
Sharekhan has listed 16 debt funds that are high-quality short duration and corporate bond category schemes. Also, investors with a short-term tenure should prefer liquid category schemes than arbitrage schemes given the current market scenario, the brokerage added.
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