Mutual Fund Dilemma: Should Investors Avoid Debt Funds?

The freeze of six funds by Franklin Templeton some time ago has shaken mutual fund investor confidence in debt funds. While a recent report indicates that four of these funds turned positive cash after receiving Rs 1,498 crore in the past two weeks, another report indicates that the net asset value of four of the frozen funds fell by 6, 32% after Rivaaz Trade Ventures defaulted on its scheduled debt obligations. due August 31.

Aside from the fluctuating fortunes of investors in the six frozen Franklin Templeton funds, there are concerns that the slow recovery in India’s economy hit by Covid could lead to more bond defaults – especially of companies offering luxury goods – after the end. of the moratorium period on loans.

So what should loan fund investors do to keep their hard-earned money safe?

“Another six months will test the nerves of companies in terms of cash flow. Only debt-ridden companies that can take on new debt cheaply and reduce their debt service burden will be able to survive. Others will be in trouble, ”says Ajay Sharma, director and appointed partner, InvestmentMitra Advisors LLP.

“For a while, we keep our investors away from debt funds because it is difficult for us to study each company’s balance sheet in detail. Last year we invested a lot of money in non-taxable bonds and other high quality PSU bonds from our HNI clients, ”he added.

Other than PSUs and tax-free bonds, what investment avenues should investors choose at this stage from a security perspective?

“At this point, investors can opt for overnight and liquid funds for short-term liquidity needs. Arbitrage funds with deposits from high quality companies like HDFC Ltd and bonds for 1 to 3 years can be another option, ”Sharma explains.

“We withdrew from other debt funds,” he added.

“In addition, we advise those who want to invest for around three years and are willing to take a little risk to get exposure to peer-to-peer lending as well as equilibrium advantage funds,” said Sharma.