Debt MFs too carry risk

Simply put, debt schemes invest in fixed income securities and generate returns by earning interest income.

May 24, 2020 10:39 pm | Updated 10:39 pm IST

What are debt mutual funds?

Just like equity mutual fund schemes investing in equity or shares of listed companies, debt mutual funds invest in debt papers such as non-convertible debentures, government securities, corporate bonds and certificate of deposits, among other instruments.

Simply put, debt schemes invest in fixed income securities and generate returns by earning interest income.

What kinds of schemes exist within the debt category?

The overall debt category of funds comprises many different kinds of debt schemes that are categorised on the basis of the kind of debt papers they invest in and the tenor of such instruments.

Some of the largest categories in terms of assets are liquid funds, short duration funds, corporate bond funds, overnight funds, banking and public sector undertaking funds, low duration funds, ultra short duration funds and money market funds.

The category also has a few other kinds of schemes such as credit risk funds, gilt funds, dynamic bond funds and medium-to-long duration funds.

Are debt schemes popular?

In terms of overall assets under management (AUM) of the Indian mutual fund industry, debt accounts for a larger share compared with equity; so, one can say that debt schemes are indeed popular. As per the latest numbers from the Association of Mutual Funds in India (AMFI), debt AUM was pegged at almost ₹13 lakh crore as on April 30 while the equity AUM was about ₹7 lakh crore. Incidentally, debt funds are also used by corporates and institutions as part of their treasury operations to earn a higher yield compared with just parking the money in bank fixed deposits.

Are debt schemes completely safe?

While there is a perception that debt is comparatively safer than equity, it will be wrong to say that debt is completely safe. Debt instruments are also prone to market fluctuations that directly impact the yield or the interest income and the maturity value of the underlying debt paper.

The recent past has seen a few instances when debt funds took a massive hit due to defaults by entities whose debt paper the schemes were holding. If the rating of a debt instrument falls, it directly impacts its valuations that is, in turn, reflected in the net asset value of the scheme.

Should retail investors put money in debt schemes?

Every financial adviser would say that debt should be a part of asset allocation of every investor. However, one needs to understand the risks and structure of a debt fund properly before investing.

One should see the portfolio of a scheme before investing. If the scheme has too much of low-rated paper, then it could be risky, especially when the markets are volatile. Debt instruments with AAA rating are the safest but low-rated papers offer higher yield. So, one should carefully analyse the portfolio to take an informed decision.

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