Retail investor participation in debt mutual funds has waned considerably over the past couple of years, with spate of corporate bond downgrades and defaults impacting the performance of debt schemes.

Franklin Templeton winding up six of its debt funds recently has been a further blow to retail investors. Many investors have hence turned wary of investing in debt funds.

Good returns

But despite the short-term pain, debt mutual funds can deliver good returns for investors over the long run, said A Balasubramanian, MD and CEO, Aditya Birla Sun Life AMC. “While the IL&FS crisis in 2018 was a one-off event, it prolonged for a long period of time, which impacted returns. We could also see some pain in the current year. But over the long run, debt funds deliver good returns for investors.”

He was speaking at a webinar How safe are debt mutual funds organised as part of the BusinessLine Knowledge series. The event, presented by Aditya Birla Sun Life Mutual Fund, was moderated by Radhika Merwin, Associate Editor, BusinessLine .

Investors who are conservative should stick to treasury schemes to minimise risk, added Balasubramanian. “Quality credit schemes like Banking & PSU Debt funds and Corporate Bond Funds give reasonable and predictable return. For those who want to generate extra return, there are riskier schemes like credit risk fund that earn higher return by going down the credit curve or long duration/gilt funds that carry higher-interest rate risk”, he said.

Ashish Shanker, Head of Investments Motilal Oswal Private Wealth Management, said that the next one year will be challenging for the economy. “Investors should identify how much of their portfolio is invested in risky funds. If it is a reasonable amount, say 25-30 per cent, regardless of the potential for (future) return from these funds, they should reduce risk (from their portfolio).”

Taking stock

With the AT1 bonds of YES Bank being written down and impacting returns of debt funds invested in them, investors have also been worried about such risks recurring in future in other debt funds.

“The regulator may look at tweaking regulations around debt funds investing in AT1 bonds and restrict it to only riskier funds such as credit risk funds,” said NS Venkatesh, Chief Executive, AMFI.

He added that investors have to continuously track their portfolios, either themselves, or through financial advisors and the assess the risk in the funds before investing. “On a tax and inflation adjusted basis, debt funds continue to offer much higher returns than bank deposits, especially as deposit rates are on a downtrend,” he added.

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