4 Questions Debt Fund InvestorsS are Asking

Owing to the current turmoil in the debt markets, investors are apprehensive if they should invest in debt funds or continue their investments in debt based mutual funds. This article aims to answer the common questions prevailing around investments in debt mutual funds. But, first, let’s quickly recall what debt mutual funds are. Debt funds are mutual funds that invest in fixed-income securities such as T-bills, commercial papers, etc. Debt funds tend to invest in securities that are less volatile. Let’s understand the questions asked by debt fund investors:

  1. Are all debt funds considered risky?
    Debt investments are usually subject to two types of risks, namely, credit risk and interest rate risks. Credit risk refers to the delay in the repayment of the interest or principal. Interest rate risk refers to the impact of movements or fluctuations in interest rates on prices of debt securities. Yields and bond prices tend to be inversely proportional to each other. This means that if the interest rates in the economy are down, bond prices tend to move upwards and vice versa. Different debt funds carry different levels of interest rate and credit risk. Hence, all debt funds can’t be painted with the same brush, so the type of risk and level may vary in them.
  2. Should I exit from all debt funds?
    In total, there are 16 categories within debt fund instruments. Debt funds with varying maturity period invest in securities such as government securities, corporate bonds, commercial papers, treasury bills (T-bills), money market instruments, etc.
  3. What should I consider before exiting from a particular debt fund?
    Whatever the type of mutual funds you choose to invest in, you must evaluate if the fund suits your portfolio. Each type of debt categories works to cater to varying debt funds. risk profiles and investment horizon. For instance, investors with an investment horizon of less than 1 year that have a maturity period of less than 1 year such as ultra-short debt funds. Further, investors with a low to moderate risk appetite might consider investing in banking and PSU Debt and Corporate Bonds. Next, it is important to understand the credit profile of your debt securities. Don’t forget to consider their yields and credit risk. Remember, both these aspects go hand in hand with one another. Lastly ensure the fund house chosen by you is efficient enough to effectively manage the credit and interest rate risks in their portfolio.
  4. What measures are adopted by the SEBI to safeguard the interests of debt investors?
    The Securities and Exchange Board of India (SEBI) is the regulator of the Indian mutual fund industry. Considering the interests of debt investors, SEBI has adopted several measures to protect the interests of investors. This includes enforcing debt funds to create separate portfolios wherein those investments whose credit ratings have fallen below investment grade can be displaced. Creating segregated portfolio helps existing investors as they may not be impacted by the redemptions of other investors. What’s more, mutual fund units belonging to the segregated portfolio are issued to existing investors, that are locked in till the Asset Management Company (AMC) is able to recover at least some or all monies from the bond issuer.

Irrespective of the types of debt mutual funds you invest in, ensure that it aligns with your risk profile, financial objectives, and investment horizon. Happy investing!

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