How advisers are handling the debt fund crisis

By Ravi Samalad |  21-06-19 | 
 
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About the Author
Ravi Samalad is Assistant Manager - Editoral for Morningstar.in.

Debt funds have been in the news lately for all the wrong reasons. Naturally, investors are worried whether they will be able to recover their losses. Amid this chaos, distributors are proactively reaching out to clients to allay their fears and helping them reassess their portfolios. We spoke to a few advisers to find out what advice they are offering to clients. Here’s what they have to say.

Fixed maturity plans (FMPs) are better than open end debt funds

Managing funds based on predicting interest rates is becoming increasingly challenging for fund managers. We are also seeing government’s influence in Reserve Bank of India (RBI) decisions. So the central bankers could act differently than the market consensus. Fund managers cannot predict these events.

On our part, we have been recommending only funds like liquid, low duration, short-term for shorter time horizons and hybrid funds like equity savings and balanced advantage funds for medium term as we realized that most of our clients already had significant exposure to debt instruments through other means.

Investors who are invested in fixed maturity plans (FMPs) have no choice but to stay put. We feel FMPs are better in comparison to open end debt funds. This is because FMP investors get the principal and interest back after maturity if the company intends to fulfil its obligations while the downgrades impact the open-end funds immediately and can recover the written off portion only if and when the upgrade happens. Investors who have seen losses in debt funds should remain invested provided they are satisfied with the quality of the rest of the portfolio as exiting won’t prove beneficial, especially if the scheme recovers the money in future. The current crisis has not impacted the entire debt fund assets. Investors need to realize that debt funds are not completely risk-free. Any market linked product which could offer higher returns than bank fixed deposits will come its own set of risks. – Hemant Rustagi, Wiseinvest Advisors

Debt funds relatively safer than investing directly in Non-Convertible Debentures

We are in regular touch with clients to apprise them about the events transpiring in debt markets which are affecting their portfolios. Exposure in the funds we had suggested was very limited. We suggested exits in just a couple of funds where the exposure to troubled companies was higher. In the remaining funds, we advised investors to stay put.

That said, we are not moving away from debt funds. Going ahead, we will recommend high-quality accrual funds in short and medium term category. Debt funds are relatively safer and diversified as compared to directly investing in an NCD. Also, it is more tax-efficient, offers higher tax-adjusted return and liquidity.

So debt funds are a good option for retail investors. The issue started with IL&FS and has now become a contagion. Nobody is lending to these companies. They are not getting new clients due to adverse publicity, which is exerting all-round pressure on them.  In situations like this even good companies can collapse and that is precisely why we all need to act with discretion. – Suresh Sadagopan, Ladder 7 Financial Advisories.

Focus on research, ignore noise

Since the last two years, I have been recommending low duration, ultra short term funds to my risk-averse clients. We are comfortable with interest rate risk but not credit risk. Fortunately, only a few of my clients had exposure to schemes which have been adversely impacted. I think these episodes should serve as a lesson for advisers to focus more on research. Rather than debating about events/regulations which are not in our control, we should spend more time on researching funds which will benefit us and our clients. – Viral Bhatt, Money Mantra

Avoiding credit risk

My clients had exposure to two funds which have seen up to 11% loss. The exposure in terms of client’s portfolio value is not huge though. These fund houses have assured me that the fund will recover by September 2019. So I have advised investors to wait. Fund houses have been positioning credit risk funds as an alternative to bank fixed deposits among distributors. Distributors have taken this message to investors. After this crisis, I have been conducting through research on the portfolio before recommending any debt funds. I’m recommending money market and liquid funds. I have been writing articles in local newspapers to communicate with investors. - Shiva Prasad Konduru, Shiva Konduru Finserv LLP.

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Vinamra Gharat
Jun 22 2019 10:17 PM
I agree with Viral Bhatt on research should be focus for advisers! I am really lucky that I have done the same thing since I started my own advisory 2 years ago! I have 40% of total AuM (I have decent AuM!) is in debt! I have around 10% of total debt AuM in credit fund and that credit fund was the highest performer this year! So I did not have to explain my investors that their funds were facing losses!
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