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Despite economic crisis, banking & PSU funds safe: Mahendra Jajoo

Banking and PSU funds are considered to be one of the safest forms of investments. This is because these funds invest primarily in public sector and banking papers, which are the two safest segments of the debt market.Premium
Banking and PSU funds are considered to be one of the safest forms of investments. This is because these funds invest primarily in public sector and banking papers, which are the two safest segments of the debt market.

In Episode 4 of ‘Winning Over Volatility, we evaluated how banking & PSU funds stand amid the economic downturn, and the dos and don’ts of investing in this category.

Banking & PSU funds are considered to be one of the safest forms of investments. This is because these funds invest primarily in public sector and banking papers, which are the two safest segments of the debt market.

The question that most investors, however, have today is: how has the pandemic, and the subsequent economic crisis, affected the performance of these funds? According to Mahendra Jajoo, Chief Investment Officer - Fixed Income, Mirae Asset Investment Managers (India) Pvt Ltd, these funds continue to be safe investment vehicles.

“Banking & PSU funds are safe. Historical experience will also suggest that. Up to 20% can also be invested in non-banking and non-PSU papers. This is the flexibility that these funds have in terms of the CIBIL guidelines," said Jajoo, who featured in Episode 4 of ‘Winning Over Volatility—a series that guides investors on navigating the current economic crisis.

It is being organized by Livemint, in association with Mirae Asset Investment Managers (India) Pvt Ltd.

Even though they are relatively less risky, banking & PSU funds are affected by fluctuating interest rates. Elaborating on the same, he said: “Interest rates are generally cyclical in nature. If the interest rates go up, then the market value of the investment is affected. The NAV comes down, resulting in a negative return for the investor. In the last one year, the interest rates have only gone down. The wider expectation is that the interest rates will continue to ease for some time to come."

That being said, an investor should have an adequate investment horizon, and the willingness to absorb a bit of liquidity, cautioned Jajoo.

“Because there’s no free lunch—you cannot outperform bank FDs by seeking the same safety that they provide in terms of pre-fixed returns, and no volatility," he added.

Jajoo concluded by saying that there are two pertinent misconceptions about investing in debt funds.

“One is that people want to know what will happen to the interest rates in the next three years. The fact is that no one knows what will happen today, or even after 3 months from now. Therefore, the focus should shift from predicting the future to managing the future in a practical way. The second is the credit risk, which is why one should look at a high-quality portfolio. As long as you avoid aggressive credit risk, then you are fine."

Watch the full interview here.

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