When we plan out the investments across different asset classes keeping in view the risk profile and financial goals of an investor, invariably part of the investments go in the debt mutual funds. How much of it will get invested in debt funds depends on risk appetite and time available to achieve desired financial goals. It is supposed to be almost risk free investment giving better returns than bank FD with tax advantage. (https://letsinvestwisely.com/are-you-paying-income-tax-on-interest-income/)
However, in last almost 9 to 10 months, ever since ILF&S first defaulted on its credit payment( both on interest as well as principal), lot many companies like DHFL, ADAG group companies etc have defaulted on credit payment thus making rating agencies like CRISIL, CARE down grade their ratings on Non convertible debuntures (NCD), Commercial Papers(CP) etc.
So what is the effect of this on the NAV of those mutual fund schemes who had investments in debt instruments of these companies?
As per the SEBI directions , any BBB- and downward ratings by rating agencies, mutual fund schemes having investments in thesecompany’s debt paper will have to compulsorily mark down the NAV by 75% to 100% of their total investments in that company as part of mark to market losses.
In last few months, you may have noticed that NAV of quite a number of debt mutual fund schemes had to be marked down, in some cases quite heavily.
So what does it mean to us? Should we stop investments in debt mutual fund schemes? Definitely NO.
The answer lies in selecting good debt mutual fund schemes having investments in Govt / PSU / top quality companies with only highest ratings of AAA(for long duration debt paper) / A1+( for short duration debt instruments). One must ensure that choosen debt mutual fund scheme has 100% investments in AAA / A1+ rated companies only. One should take out some time and review existing investments in debt mutual fund schemes and take a call accordingly.
It is important and beneficial to invest in debt mutual funds especially in today’s environment where interest rate cycle is going southward( beneficial for debt market) and equity market is poised for big correction, in fact the broader stock market(equity) is already down heavily in last almost eighteen months, Nifty Mid cap 400 and Nifty small cap 250 bench mark indices have already corrected by 20% and 30.33% from their 52 weeks high respectively.