Meet the Manager. Retail investors shouldn’t have invested in credit-risk funds, says Arvind Chari of Quantum Advisors

Assets under management (AUM) of credit-risk funds after the ILFS debacle have been going down steadily. It was about ₹1-lakh crore in September 2018. By April 2020, it went below ₹40,000 crore.

Though Covid-19 is not the cause of the current credit crisis, it surely has intensified the problem. Investors have been wary of risks in debt funds over the last two years and with the uncertainty and risk scenario remaining, many will want to seek the comfort of an assured return from fixed deposits.

So, unless the investor is assured of liquidity and safety of debt funds, we may see some more redemption in categories other than credit-risk funds as well.

If the redemptions are only in credit-risk funds, I do not see this facility as a major help because banks remain averse to credit risk. Through this window, the bank has to buy the assets outright or give a line of credit to the MF against the collateral of the portfolio.

If they were ready to take the credit risk, they would have bought these credit-risk securities in the previous rounds of TLTRO (targeted long-term repo operation), but they didn’t. In this scenario, the likelihood of banks taking that risk is limited.

Retail investors should not have invested in credit risk funds in the first place. This is not a product for retail investors. Even sophisticated institutional investors find it difficult to understand the risk-return scenario in these products.

The Indian market is not developed enough to handle these situations. For these products, risk management and the economic outlook have to be positive and timed well. The moment there is a first sign of trouble in the economy, one is better off exiting. And that moment to exit was in September 2018.

Debt funds are the only alternative to savings accounts, fixed deposits and small savings.

Investors should first evaluate their objectives for investing in debt funds. And what kind of risk they are willing to take, and if they are okay to have some negative returns or lower returns than fixed deposits for some period of time.

The fund that you are investing in should be in line with your objectives. If an investor does not want to have any market risk, he/she should never be in debt funds. They should be parking their money in a savings account or a fixed deposit account.

If investors choose to be in debt funds, we advise them to stay for at least 2-3 years, so that they benefit from one full interest-rate cycle and hope that the post-tax returns are better than fixed deposits or similar products.

We have also repeatedly stressed that while investing in liquid funds, do not look for returns. Instead, look for funds which take very low risks and keep your money safe and liquid.

Sometimes, debt funds terminology — the fund names and nomenclatures — tend to be misleading. Investors should be wary of it. For example, most of the credit-risk category funds are categorised under moderate risk in the risk-o-meter of mutual funds.

The Quantum Dynamic Bond Fund, which invests only in government bond and AAA rated PSUs, also has a moderate risk-o-meter.

Between direct investing and debt funds, I would prefer debt funds as they will be well-diversified. Debt funds will be more liquid as one will have the option to redeem anytime, unlike some corporate bonds for which there is absolutely no liquidity. But, of course, it depends on the quality of the debt fund portfolio.

Investing in G-Sec means taking on interest-rate risk. While investing in gilt funds or dynamic bond funds, investors have to be prepared to deal with the volatility and understand that the returns may even be negative in a short time period.

Again similar to the debt fund, one needs to have a two- to three-year investment horizon, because interest -ate cycles follow that pattern.

However, it is very difficult for retail investors to time the entry or exit.

We feel rates have fallen quite a bit now. Also, given the outbreak of Covid-19 and the impact of the lockdown, we may see the government increasing its fiscal deficit, which may lead to long-term bond yields rising from the current levels.

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