Multiple defaults in the last two years had triggered concerns about debt funds. Some of the schemes have lost money in the last six months to a year. What options do fixed-income investors have after the Reserve Bank of India kept rates at record lows even as inflation is expected to rise?
“Most of the money lying in the mutual funds right now is below three years in terms of maturity and even more in less than one year maturity,” Sandeep Bagla, chief executive officer at TRUST Asset Management, said in this week’s The Mutual Fund Show. “So, the investors are sacrificing the yields or returns in search of safety and in search of predictability.”
Credit funds have not really performed in the last three to five years and because of the volatility, investors have shied away from taking exposure to some of the well-performing categories as well, he said.
After the RBI policy supported lower interest rates, any three-year fund has a roll down maturity, he said. The interest rate keeps coming down over time and the scheme offers a high-quality AAA-rated portfolio, according to Bagla.
It’s good to invest in such funds in because instead of favouring the safety net of liquid funds, an investor would get almost 250-300 basis points higher returns in these funds, he said. “And if an investor would hold the fund for three years, one would get tax benefits as well.”
Vishal Doshi, partner, Alpha Investment Managers, however, advised investors to remain at the shorter end of the curve because an uptick in inflation and rates seems imminent. He recommends low-duration banking and PSU funds.
And if there’s money lying in any of the schemes that are running into losses because of a corporate default, Doshi advised investors to take money out. That’s because default exposure is already a segregated portfolio, and when a recovery happens, as in the case of UTI Credit Risk Fund, the investor is anyways going to get that amount, he said. “So, there is no loss for the investor as such by getting out now.”