After several credit events over the past one year, starting with what happened at IL&FS in September 2018, debt fund investors are naturally a concerned lot, particularly credit risk fund investors.
There is a possibility that a set of investors are not able to exit due to huge losses in the fund and are stuck in credit risk funds.
At this crucial juncture, Arun Kumar, Head of Mutual Fund Research at FundsIndia, has an advise for credit risk fund investors.
He advises investors to evaluate three things: a) Future course of action with regard to status of the debt security which has been downgraded or defaulted; b) whether the impacted security is side pocketed - an option where the fund house segregates the impacted security into a separate portfolio; c) To check the credit quality of the remaining portfolio and check for concentration risks from a company level and group level.
Credit-risk funds are debt funds that have at least 65 percent investments in less than AA-rated paper.
The back-to-back downgrade of debt instruments from IL&FS and Dewan Housing Finance (DHFL) by rating agencies had hurt credit risk funds.
The net asset value of some of the schemes that had investments in DHFL and IL&FS fell as much as 50 percent.
Established in 2009, FundsIndia is an online investment website headquartered in Chennai, Tamil Nadu. Owned by Wealth India Financial Services which was initially created only for mutual funds, it later introduced other investment products like stocks, corporate fixed deposits, and bonds.
FUNDS FOR INVESTMENT
For first-time investors, Kumar recommended dynamic equity asset allocation funds which auto-adjust equity allocation based on market valuations.
On the debt front, investors who are looking to make investments for the short term can look at short term debt funds with low duration and high credit quality.
Short term debt funds invest in debt and money market instruments maturing in one to three years. This investment is usually accompanied by stable returns and modest risks.
He pointed out that long or active duration and credit risk funds can be recommended as a part of the "outperformance" bucket to investors who are aware of the underlying risks and volatility.
Kumar believes that while the valuations look optically expensive on a trailing PE (price-to-earnings) ratio basis, but taking in to account other valuation parameters such as price to book, market cap to GDP valuations look reasonable.
He feels, the earnings growth is yet to pick up, and the low corporate profits to GDP ratio indicates that we are near the bottom of the earnings cycle.
"We believe that if you have a 5-7 year time horizon then the earnings growth should be much higher than the expected nominal GDP growth. Thus, we remain positive from a 5-7 year perspective as earnings growth is expected to improve and valuations are reasonable," Kumar said.
On the possible triggers for the market, Kumar envisaged further momentum in government reforms, pick up in earnings growth, stable oil prices and strong FII flows can help the market to gain.
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