BT Insight: Interest rate, credit and concentration risks in debt funds that you must know about
Unlike equity investment, where the long-term approach is appreciated, debt investment should be avoided for long-term goals as longer the investment horizon, the higher the uncertainty on the interest rate and credit risks
- Jun 17, 2019,
- Updated Jun 17, 2019 6:39 PM IST
The ongoing liquidity crisis in the NBFC sector is a vicious one. The delayed payment by Dewan Housing Finance Corporation (DHFL) on its non-convertible debenture (NCD) last week, a slash in its credit rating for short-term papers and a resultant mark-down of net asset values (NAVs) by mutual funds - as mandated by mutual fund association AMFI - has intensified troubles for other NBFCs, whose borrowing power is getting weaker by each passing day. While the Reserve Bank of India (RBI) has cut policy rates three times in a row, the transmission is missing. Besides, since banks have sectoral caps and the debt market is seeing outflows, the revival of the sector would be a daunting task. However, it should not bring a bad reputation to debt funds. Investors need to understand the risks and rewards clearly instead of shunning debt funds in a hurry.
"Often investors chase yields and hence compromise on the quality of the portfolio. They should identify debt schemes on the basis of their investment objective and risk profile. The critical learning out of the current episode is that it throws light on the credit-risk associated with debt funds that was largely ignored by investors earlier," says Devang Kakkad - Head Research at Equirus Wealth Management.
Below is a handy guide to debt funds and some of the key risks involved in debt fund investment:
Anil Ambani falls off billionaire club; equity wealth crashes from $42 billion to $0.5 billion
The ongoing liquidity crisis in the NBFC sector is a vicious one. The delayed payment by Dewan Housing Finance Corporation (DHFL) on its non-convertible debenture (NCD) last week, a slash in its credit rating for short-term papers and a resultant mark-down of net asset values (NAVs) by mutual funds - as mandated by mutual fund association AMFI - has intensified troubles for other NBFCs, whose borrowing power is getting weaker by each passing day. While the Reserve Bank of India (RBI) has cut policy rates three times in a row, the transmission is missing. Besides, since banks have sectoral caps and the debt market is seeing outflows, the revival of the sector would be a daunting task. However, it should not bring a bad reputation to debt funds. Investors need to understand the risks and rewards clearly instead of shunning debt funds in a hurry.
"Often investors chase yields and hence compromise on the quality of the portfolio. They should identify debt schemes on the basis of their investment objective and risk profile. The critical learning out of the current episode is that it throws light on the credit-risk associated with debt funds that was largely ignored by investors earlier," says Devang Kakkad - Head Research at Equirus Wealth Management.
Below is a handy guide to debt funds and some of the key risks involved in debt fund investment:
Anil Ambani falls off billionaire club; equity wealth crashes from $42 billion to $0.5 billion