Skip to main content

RISKS of DEBT SCHEMES


Lets us first understand what makes the NAV of debt schemes move to better understand the actual impact of this move.

WHAT ARE THE RISKS THAT DEBT SCHEMES ENTAIL?


CREDIT RISK:


Mutual Funds invest in debt securities such as Government Securities and Bonds issued by companies. While the Government Securities (or Gilts) are considered risk free on account of credit, they remain highly rate sensitive. Similarly, corporate bonds also react to the rate movements. They however, can also decline in cases of rating downgrades since companies can default on their debt. We saw similar price impacts in past in case of JSPL & Amtek Auto.

Mitigation: Strong fundamental research regarding the underlying papers helps in making the right choices. Along with this the portfolios are managed dynamically to ensure the rebalancing in case of any risk of default.


LIQUIDITY RISK


The fund manager may not be able to liquidate a security due to lack of demand (low volumes) or even inappropriate valuation being offered.

In such cases, the Fund Manager may be forced to hold the security for a longer period than he / she desires. In case of very high redemption pressure, the fund manager may sometimes be forced to sell the security at a low price or may be forced to restrict redemptions. Hence, you may not be able to take out money even if you wanted to.

Mitigation: All the funds, any point in time, maintain sufficient liquid/cash equivalent assets in order to meet the anticipated redemptions.


INTEREST RATE RISK:


A debt scheme is merely a portfolio of underlying bonds. The maturity (or better assessed through 'Duration') is a measure of how sensitive the bond is to movement of market interest rates. The duration of the scheme is the weighted average of duration of underlying securities.


Higher the duration (interest rate sensitivity) of underlying bonds, higher the resultant duration of the scheme. And higher the duration of a mutual fund, the greater the sensitivity of NAV to interest rate movement. In simple terms, if the duration of a debt scheme is 8, the NAV of the scheme will go down by 8% if the interest rate goes up by 1%. On the other hand, if the interest rate goes down by 1%, the NAV of the MF scheme will rise by 8%.


It is however, notable that any adverse impact of duration is more marked to market basis and still reversible unlike credit, where the impact of adverse credit movement can prove to be irreversible.


Mitigation: Backing on strong economic research and macro indicators, the fund house has benefitted from various rate cycles by switching strategies from "accrual to duration" and "duration to accrual" as and when required. Over the past many market cycles

NAV of debt funds can be influenced from external events also apart from domestic factors like inflation, growth etc as they can manifest in any of the above mentioned risks.

For instance, in mid 2013, a number of foreign investors started selling Indian debt heavily on account of Taper Tantrum and resultant risk aversion to all emerging markets including India. Excessive selling put pressure on bond prices as when the supply is high (people are selling) as compared to demand, prices typically go down. NAV of debt mutual funds across categories took a severe beating during the time.

Fund Categories largely differ based on their interest rate sensitivity (measured through Duration) or the average credit quality of the underlying securities that they invest in. Generally, the funds with higher duration or more aggressive credit positioning are the most volatile. As such, during July 2013, many debt funds faced similar NAV impact as in Feb 2017.

Now, what should a normal investor do in such moments of stress? Typically, in the fear of losing more an investor tends to redeem the investments and thus books these marked to market losses. It is important here to note that, the chances of one's capital getting wiped off in a debt scheme are low as long as it is duration driven. The loss, however severe will be notional unless redeemed. Especially, when the economy is stable and bond prices fall due to negative sentiment, one should ideally wait for the fund to recover losses.

Is the recovery possible?

Yes, it is possible for a debt scheme to recover by continuing to accumulate the coupons from various underlying holdings. At the same time as sentiment reverses (for better) and markets recover, the positive movement from bond prices also adds to recovery.

But, how long one must wait before the losses are recovered?

The answer to this question is quite subjective as the time require by different funds will be different. The activity level of fund management also plays an important role in such NAV recovery.

Let's assume Fund A has a YTM of 6% and Fund B has a YTM of 8% & NAV of both the funds suffers due to a market event by 3%.

Now Fund A will recover in 6 month while Fund will make the same recovery in 2-3 months.



Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds

Top 10 Tax Saver Mutual Funds for 2017 - 2018

Best 10 ELSS Mutual Funds to invest in India for 2017

1. DSP BlackRock Tax Saver Fund

2. Invesco India Tax Plan

3. Tata India Tax Savings Fund

4. ICICI Prudential Long Term Equity Fund

5. Birla Sun Life Tax Relief 96

6. Franklin India TaxShield 

7. Reliance Tax Saver (ELSS) Fund

8. BNP Paribas Long Term Equity Fund

9. Axis Tax Saver Fund

10. Birla Sun Life Tax Plan



Invest in Best Performing 2017 Tax Saver Mutual Funds Online

Invest Best Tax Saver Mutual Funds Online

Download Top Tax Saver Mutual Funds Application Forms


For further information contact SaveTaxGetRich on 94 8300 8300

------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

OR

Call us on 94 8300 8300

Popular posts from this blog

Post Office Deposits Interest Rates

Best SIP Funds to Invest Online   SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich For further information on Top SIP Mutual Funds contact  Save Tax Get Rich on 94 8300 8300 OR You can write to us at Invest [at] SaveTaxGetRich [dot] Com

HDFC Capital Protection Oriented Fund – Series II 36M May 2014 NFO

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300     HDFC Capital Protection Oriented Fund – Series II 36M May 2014 NFO will be open for subscription from 16th May 2014 to 30th May 2014. The key features of the scheme are as mentioned below:   Type of Scheme A Close Ended Capital Protection Oriented Income Scheme Benchmark Crisil MIP Blended Index Fund Manager Mr. Anil Bamboli , Mr. Vinay R Kulkarni & Mr. Rakesh Vyas New Fund Offer (NFO) Period 16 th May 2014 to 30 th May 2014. Minimum Application Amount Rs. 5000 and in multiples of Rs.10 thereafter Plans/ Options Offered Growth and Dividend Payout Facility Liquidity To be listed For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

How to PPF Account extension after maturity

A PPF account can be retained after maturity without making any further deposits. The balance will continue to earn interest till it is closed. Public provident fund or PPF remains one of the most popular savings options for the long term despite a gradual decline in interest rates over the years. PPF accounts have a maturity period of 15 years and they can be extended. If there is no fund requirement, financial planners say, PPF account holders should extend the account beyond 15 years. In terms of income tax implications, PPF accounts enjoy the benefit of EEE (exempt-exempt-exempt) status . Under Section 80C, contribution up to Rs 1.5 lakh in a financial year qualifies for income tax deduction. The interest earned and maturity proceeds are also tax free. What are your options when a PPF account matures? 1) A PPF account can be closed after the expiry of 15 financial years from the end of the year in which the account was opened. 2) The subscriber can retain his

Goldman Sachs Mutual Fund - Goldman Sachs India Equity Fund

Tax Saving Mutual Funds Online Current open Infra Bond Application form   GOLDMAN Sachs Mutual Fund, the Indian mutual fund ( MF ) arm of the US financial major Goldman Sachs, has filed an offer document with the securities regulator for its first equity fund launch in India. Goldman Sachs India Equity Fund will be an open ended equity scheme with 80 to 100 per cent asset allocation to equities and up to 20 per cent allocation to debt securities and money market instruments. The scheme will be benchmarked to NSE's S&P CNX 500 index. This scheme will be the first equity fund floated by Goldman Sachs, apart from the already operational schemes that it acquired from Benchmark Mutual Fund, an ETF ( exchange traded fund ) provider. Goldman Sachs Asset Management, last March, bought Benchmark Mutual Fund , pioneers of ETFs in India. Besides ETFs based on Indian equities and gold, the fund house also has a ETF that tracks securities listed on Hong Stock Exchange that has

SUNDARAM SELECT MIDCAP

Best SIP Funds Online   SUNDARAM SELECT MIDCAP is a mid-cap focused fund has shown remarkable consistency in outperforming both its benchmark index and the category over many years. It takes a sharper tilt towards mid-caps compared to its peers. While the fund manager used to take large positions in his conviction picks, he has moderated exposure to his top bets over the past year. He has also chosen to stay away from capital guzzling businesses instead favouring those with efficient capital allocation practices. SUNDARAM SELECT MIDCAP fund boasts of a superior risk-reward profile compared to many of its peers, and while it has underper formed slightly over the past one year, its proven track record in the hands of a capable fund manager provides comfort. It remains a worthy pick in the midcap basket. SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich For further inform
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now