Debt funds in india
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| Debt funds in india |
Hi friends welcome to Blogger Bro your online solution for all your Debt Funds investment needs today we will be covering our Debt funds in india and you know and we'll also be covering or what is exactly the case which happened with Franklin and why they shut down six of the idea to mutual funds .
So it's gonna be a slightly longer Article another thing I like to tell you before I started is please subscribe to a channel if you like the Article please hit the Subscribe button it motivates us to bet do better right so right .
Debt funds
So now let me start in this presentation in this Article will be actually be covering what our debt funds what are the different kinds of debt funds what are the impact what are the important factors.
Which impact debt funds like mainly yield duration and interest rates or who should be investing in these debt funds and what we should be looking at what what are the risk involved and lastly we'll move into why the Franklin Fiasco has happened and what is the cause for it and what should a investor do now.
I'll also be giving you a tip as to if you are a debt investor and you like you want to invest in debt funds what you should be looking for to keep your money safe and get a good return as well so let's start with what our debt funds so like equity funds there's a equity stock market in India there's a debt market.
Debt funds best
As well right so mutual funds invest in primarily in debt instruments now they're different kind of debt funds based on what are then in their they are investing in so you have liquid funds they basically invest insecurities which have a maturity of 90 days they'll be guild funds there'll be money market funds there'll be low duration funds.
So low duration money market is more or less three to one year and short term funds are mostly for that and if you're looking for two to three years time they're generally corporate bond funds they are our risk funds which have this maturity or average matured duration of two to three years.
When you look at longer terms they're longer term funds and so when you know long-term debt funds which are four five years ten years seven years ten I see the other ones also for fixed maturity plans.
which have a similar hue if these your money gets blocked in them and there is no known Bob you know like interest rate risk in them so you know ball rather than telling you we need to understand it the foreign debt funds.
Short term debt funds
We actually need to understand what is the risk involved in them and what are the things which impact them right so let's start with the yield yield is basically what is your return on your in on your in a new investment right.
So if you have a FD say it's giving eight or nine percent or seven percent return so that yield on your investment is seven percent or six percent depending on what your FD is and there is primarily no interest rate risk because the your interest rate is fixed.
In case of FD either ambulation they will see duration then duration is what is the maturity of the paper which is the fund is investing in so they'll be average maturity in these Debt funds in india.
So liquid funds will have 90 days unless when you will go to other one some will have two years three years seven years 80 or side but what is the importance of duration right duration is kind of am
a sure to interest rate movements in the market so it's a sensibility right.
So longer the duration is longer will be the impact due to the interest rate I will be the impact due to interest rate movements so motor motor I can tell you like if the duration is three years.
So one percent movement upwards in interest rates will cause a three percent fall in in the price of the fun so the price of the bonds will go down by three percent so if you have a five year or six years then will be 5% and 7%.
So on this is the motor motor calculation can be higher or lower but more or less it comes to this now now you know we need to also look at what is the risk which is involved in that function.
Because what what happen sis and that funds people are investing in that fun thinking that they're safe because they'd be mistaking them for fds fdz to realize that there is no interest rate risk there's a small credit risk which is as the Bank defaults right.
So if say p.m. seed co-operative bank defaulted on its on its payments right so that is or creditors which is then banks as well right but there is going to street risk over here so what is the difference an interest rate risk your interest you might get a higher interest rate or a lower interest rate.
But in a credit risk you might not get your principal back or your investment back as well so you lose not only your interest but apke principle known within jaya right so rather than luring about return on capital your return of capital also will be jeo pardized.
So when we look at now let's look at this in terms of you know which funds have what and what a person should look for so if you look at liquid funds liquid funds are investing into your own government securities into very high rated triple-a rated corporate bonds.
So they more or less have no credit risk so there is there's a very very minimal chance of default in fact I'll say there's a lesser chance of defaulting liquid funds and banks also.
Because they're investing in one bank so you're not stuck in with one bank right so if a bank goes down it's not gonna happen that all these investments will go down right.
Because they're investing the number of instrument of papers so liquid fund has interest rate risk but no credit risk ideally right so a person in this scenario also can invest invest in liquid funds now.
If you're looking at a higher 10 yo or 3 - higher than 3 months say up to 1 year or 2 years then you can look at up to a year you can look at money market and short term funds.
If you know low duration funds now there's a different kind of funds as well called credit risk funds these other than looking at interest rates they actually try and get a higher for investors based on taking higher credit risk right.
Debt funds in india
So they will not look at they'll actually take higher credit risk by that I mean they'll start investing into companies which have a lower credit rating so they'll move away from a and government securities they'll go into you know double-a probably a lean lower than that.
So they'll take a higher credit risk and Jeetendra to that extra return that's the those are credit risk they're corporate bond funds which is invest into papers which are which are held by companies right.
So they give you a higher return than what government will give you cause you're taking on a higher risk they're these girls as well give or girls are basically dead funds which invest primarily in government.
Securities they have no credit risk because there's no risk of non-payment of in you know on principal or interest because sorry non-payment because of crack there's no credit risk in them cause government will always pay its money back and there's only interest rate risk.
In these and the longer the tenure generally you know you if you're looking at investing and playing on investing and debt funds you should look at guild funds at this point of time cause there is no credit risk at all and the government will not default on its obligations on its debt obligations.
So your you can look at having a plane in debt funds but our long-term debt funds even but you have to understand you know what they are investing into and they generally don't securities which they should be investing into nowadays because of this need to have safer safer debt instruments.
Funds have come out with you know banking and PSU funds as well which invest only in debt which is of PS use and banks because they're considered much safer than corporates so they're these funds as well now we don't when you are investing.
So let's look at what is the current interest rate so not even his rates have come down they've been cut drastically all over the world so USC no almost nearly India has cut down interest rates by almost a percent wheel where the lowest and as you know for the last two three years and do we see a further interview as rate cut over here they might be a half of 1% rate cut.
But I don't see you having a higher rate cut than that so should you be investing into long-term debt funds I don't think so because if you're holding there for more than three to four years probably after this Karuna is gets over interest rates will move up and you will have a you know a negative return.
So long-term debt funds you could hold them considering you know if you want to still get into debt but I don't think so you would there's much more into sleep so for long in India as well for more than and probably half a percent amount of it at best it's also unlikely now.
So now you know let's look at now since we understand this part we can you know you can probably move on to see analyze what what happened to franking so Franklin with Franklin what has happened is they their six debt funds have actually been worn down what do you mean by that you mean that there'll be no future redemptions.
There'll be no future buying of these funds so I'll just tell you the name of these funds is Franklin Anglia credit risk fund the strengthening their dynamic accrual fund Franklin income opportunities fund.
Franklin India low duration fund short term income plan and ultra short bond fund so you know all these funds were good funds in their category they were like top 5 they've always been there in terms of returns and why have they been there right.
So Franklin has always you know taken pride in the fact that they are very good in assessing credit risk and so they were taking higher credit risk than other people other fund houses in their debt instruments.
And their and the returns will also reflect the same so the team was in fact franking was thinking a higher they credit risk then what they should have and they were generating higher returns.
As well so tracking is a good fun house and their fans have done very well over the past 25 30 years and but this strategy is actually good but they never took into account I know what is this curve they probably.
Would have not taken a scenario where you know what if the worst happens right so if there's a default or they do not they cannot sell the papers in the market so the two things which is actually if you look at it the Franklin has not fracking companies.
I have not I have not defaulted the reason why they're having problems is people are pulling out money from these funds so people could be pulling out money because corporates need money right now.
So the liquidating all the investments they can I know retail investors might be looking at you know KP you also need money for household expenses HN I do so might be looking at you know okay let's move or market to equity because you know equities are put we undervalued and we'll get a higher return there.
So there are all returns redemption pressure on Franklin funds and with that what has happened is they were going to borrow in from you know banks.
They'll be borrowing from the bank to pay
redemptions and they've come to a point where they can not do it anymore so the redemption pressure is so much.
That they have finally said that you know we are winding down these funds and investors will be given their money as and when the you know the payments come in so if you have a three year like a fund.
Which has a three year duration average duration then you money we should ideally come back in three years until unless no company defaults you know if there's default then probably there will be a hit on nav or there'll be a loss which you might see so this is what and if you have like a short term fund or six months or fund having six month duration.
Then you probably should have money come in it coming in six months so another thing is that these funds because you enjoy investing into it they've what they've done is they've invested in two companies which have a rating offer EE and below right.
So they've actually looking at Franklin Detroiters has a has around 50% of his portfolio which is investment companies which have a credit rating below doubly so there's a lot of credit risk involved over there and unfortunately.
You know Indian markets are not markets are not so developed as they are equity markets are and there's actually a very limited way to get rid of these low rated papers in India until this you don't hold them to maturity.
So they you cannot even sell them in the market so that is another thing which is there in India unfortunately our debt markets are not very involved so if you are a high rated our government security you probably can get more liquidity and sell it
in the market.
In fact take some money but in this scenario when no one wants to take you on credit I suppose you don't know what the future cash flows of the companies are they probably are not getting any buyers also also for it so there's a lot of Redemption and this is what has happened now what should our Investor.
Do you know I really do not invest idly move your money out from all those funds which are actually investing into companies which which have a lower rating so of course they're looking at you know and because we don't know what the future cash flows are going to be for these companies.
So I do not invest into care address funds and if you have fairness funds there is no harm when you're moving out in your money out from there and putting into funds which I'm probably investing into government securities.
So you have you know there's no there's no credit risk involved in that so this it so this is what where you can invest and it is very important for us you know to understand your people do not understand what the risk and world is in investments you know it is it's essential for an investor to understand.
What he's investing in to read the documents make the effort to look at what a fund is holding right what's the sport for you like if it's a quitter you have to look at what equities it is holding you have to understand what risk you're getting into if you looking at it you have to look at what paper is holding.
So you should not be like you you know investing in a liquid fund or a short income fund but you know that you know there's no the fund is taking credit risk as well and you not aware of that fact when you assuming your fund is Nick IFD and you will get your money back after two years.
So the problem happens when people do not understand that debt funds are also the skete because they're too risk involved and you can lose your money over here as well right so it is not always important that.
You look at only returns right so returns should not always be looked at when you really messing in net funds as I pointed out before as well because the return is getting generated by taking a higher risk and whatever in the world can go wrong.
You should assume you should take your options what is my best case scenario and what's my worst case scenario and if your worst case scenario is that all your money will go of any ok with it well and good.
You can take this risk but if you're not ok with that thing you should not be investing into funds which you do not understand owing you can you know I'll advise you to you know go and talk to your advisor understand take advice from friends who probably know about invest investments and invest wisely and safely upon your investments in Debt Funds in india.
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