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Credit risk in debt funds a sensitive factor: Mahendra Jajoo

There are two risks associated with investing in debt funds—one is the duration risk or the interest rate volatility and the second is the credit risk. (iStock)Premium
There are two risks associated with investing in debt funds—one is the duration risk or the interest rate volatility and the second is the credit risk. (iStock)

In Episode 2 of ‘Winning Over Volatility’, organized in association with Mirae Asset Investment Managers (India) Pvt Ltd., we discussed how one should go about investing in debt funds, especially in light of the current economic downturn.

Credit risk in debt funds is a sensitive factor—be sure to invest in credits that are of high quality, said Mahendra Jajoo, Chief Investment Officer - Fixed Income, Mirae Asset Investment Managers (India) Pvt Ltd., in a recent interaction with Livemint.

Jajoo featured in Episode 2 of ‘Winning Over Volatility’, a four-part interview series that highlights how you can manage your mutual fund investments amid the economic downturn. It is being organized by Livemint, in association with Mirae Asset Investment Managers (India) Pvt Ltd.

He pointed out that there is a lot of misconception about debt funds because of a lack of interest or study.

“There are two risks associated with investing in debt funds—one is the duration risk or the interest rate volatility and the second is the credit risk. These are also the primary factors driving the returns. If one is investing in a duration product, then there’s no fear of the eventual loss of return of principle, or a reasonable return. As long as you the time and the patience, you will enjoy good returns at the end of the cycle, when the interest rates are in your favour."

He added: “Credit risk, however, is a little more complicated because the challenge with credit is that if there’s a default, then all the return calculations will be invalidated."

Jajoo also highlighted that the current economic crisis shouldn’t stop investors from opting for debt funds. “I think there’s never a good or a bad time to invest in debt funds, as long as it is an asset allocation. If you start looking at debt as an asset allocation in your overall portfolio, then every time you have an incremental cash flow you can invest in debt."

On why one should invest in debt funds, Jajoo said they have historically given good returns.

“I think history is a good indicator. If you look at the last 25 years, debt funds have consistently given good returns. And the returns have been superior to that of other options. That’s because debt funds are market-related products, and the market is the best compensator," he emphasized.

Watch the full interview here.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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