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Mutual Funds - A three-step debt fund portfolio check

24 Apr 2020

Should investors see the move by Franklin Templeton Mutual Fund to wind down six debt fund schemes as a trigger to exit their own investments in debt funds? If you have investments in any of the affected funds then there is very little you can do except wait for your money to come back to the extent it will. As for your other investments in debt funds, the right course of action will depend upon the portfolio you are holding. Here is a quick check for you to conduct on your debt fund investments.

Do a portfolio review

Don’t sit back just because you did not invest in a credit fund and therefore believe you are not going to be affected. A fund may hold a portfolio with a high credit risk in any of its other category of funds too since there is no credit quality specification on what a fund can hold. A portfolio that holds pre-dominantly AAA and equivalent and exposure to lower credit ratings of AA and such is in companies with good parentage or names that you recognize as good quality companies should give you comfort. The exposure to unrated paper and lower credit quality should form a very small percentage, say not exceeding 5%, of the portfolio. “We look at securities that a portfolio holds and how many other debt funds across the industry hold them. It is a red flag where a security is held pre-dominantly by one or two fund houses alone", said Munish Randev, Independent Family Office Advisor. The portfolio should not have concentrated holdings- either in individual issuers and in industries. For example, a portfolio that holds a considerable portion of its portfolio in securities issued by Banks, financial institutions, NBFCs, housing finance companies is very vulnerable to a downturn in this segment.

Ask the right questions

The debt portion of the portfolio is the safe portion of an investor’s overall portfolio. It is important therefore to focus on the risk and not the return so much. The investor should ask and find answers to how a fund is generating higher returns than its peers and the market. If they are uncomfortable with the strategy being used and its implications then an exit is warranted. If you have an advisor to help with the investment then get a better understanding of the investment process that the fund house is following to manage liquidity and asset quality.

Check your exposure

Unless it is investment in a liquid fund or overnight funds where portfolios may be more or less similar, it is important for a retail investor to not have too large an exposure, say more than 10% of debt allocation to a single fund as per Randev. He also cautioned against taking exposure to multiple funds of the same fund house to avoid the risk from a similar approach to risk and fund management.

While there is no denying that the economy and the mutual fund industry is going through trying times investors should avoid making changes to their investment decisions without any good reason to do so. Run a quick portfolio check and see if there are points of concern. Reach out for advice from people qualified to do so if you think you need it. If changes have to be made then keep the cost and tax aspects in mind. For most investors, debt funds provide a tax-efficient alternative to traditional fixed income options to provide liquidity and to park funds for different time horizons. Don’t deprive your portfolio of that advantage by exiting without cause. But at the same time take only those risks that you understand and are comfortable with its consequences.

Source: Live Mint BACK