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The write-down of Yes Bank’s additional tier 1 (AT1) bonds as part of the bank’s reconstruction scheme is one more shock that debt fund investors have had to absorb, as credit episodes unfold in the Indian debt market one after another. In this scenario, the question arises if retail investors have the requisite skill to evaluate the risk and return in the various categories of debt funds and their suitability to their portfolios. Sunita Abraham asks experts if it makes sense for retail investors to access debt funds only with the assistance of professionals who are better qualified to assess the risk, return and suitability of a fund.

Lakshmi Iyer, Chief investment officer, debt, and head, products, Kotak Mutual Fund

It is imperative to assess funds with the help of an adviser

In Mahabharata, even the astute Pandavas sought the advice of a guru, Krishna, to guide them in the battlefield. The world of investments is no different. There are multiple battles which need to be fought as an investor—beating inflation, maintaining the right asset allocation and being mindful of risk while making such investments, among others.

The Pandavas were skilled in various astras (weapons), from mace to spear to bow and arrow. How many such astras do retail investors really have? It may be difficult for an uninitiated retail investor to say, “I know it all." That’s where the importance of a sarathi or an adviser comes in. It is imperative that such investors seek inputs from an adviser before taking investment decisions.

This assumes more significance in debt-oriented strategies where one needs to assess credit-worthiness apart from taking a view on interest rates. Just like a family doctor guides you on the basis of your body and/or ailment, an adviser can guide you with regard to your financial health on the basis of your goals and risk appetite.

Ganesh Ram, Business head, mutual funds, BSE

Don’t take risk if you don’t know how debt funds work

Debt mutual funds have been in the news for the past couple of years and not always for the best reasons. According to market data, inflows in debt funds are significantly lower as compared to equity funds despite the considerably higher risk that equity funds carry.

This may be an indicator of the lower comfort and understanding that investors have of how debt funds work. Until investors understand the difference between traditional debt products like fixed deposits and small savings schemes and debt funds, it is best to invest through an adviser who can explain the risks associated with a fund and their suitability given the risk appetite, financial needs and goals of an investor.

It is risky for investors to chase that extra 1% or 2% return on investment without understanding the risks that accompany it and the implications of lower liquidity and credit quality in a debt fund.

An adviser can help decode all of this. Above all, investors should stay alert and increase their financial awareness even if they have access to proper advisory.

Munish Randev, Independent family office adviser

Identifying specific security-level risk is tough

Till recently, there were few debt fund categories but each had funds with diverse risks. Thanks to the Securities and Exchange Board of India (Sebi), we have tighter descriptions for each category, but that hasn’t made things easy for investors.

Being able to choose the correct fund type for the portfolio is still a daunting task especially when the interplay between duration and credit risk has to be understood in conjunction with debt market parameters. Even if the investor understands the above risks, it’s difficult for him/her to be able to identify specific security-level risks which requires expertise.

A single credit event in any holding can lead to capital loss which is not easy to recuperate from. While some of these events will surprise even the experts, many can be foreseen and avoided with correct and timely advice. This naturally requires the investor to consult an adviser; the assumption being that the adviser has enough experience and, most importantly, has no conflict of interest while advising.

Note that choosing the right adviser is important.

Gaurav Mashruwala, CFP and founder, Gauravmashruwala.com

Debt products are complex and need more calculations

Over the years, mutual funds have been launching enhanced versions of debt mutual funds to cater to the need of a variety of investors.

By nature, debt instruments are more complex and require enhanced numerical calculations. Also, in India, debt markets are restricted mainly to institutional investors and retail participation is predominantly through debt mutual funds. This has resulted in less transparent debt markets. Also, in recent times, we have witnessed several anomalies by the issuer (borrowers) of debt instruments. These are in the nature of delay, deferments and defaults in honouring the payments of the interest and principal amount.

For a retail investor, it may be difficult to focus on several factors needed to take prudent decisions on investment in debt mutual funds. Therefore, only if the retail investor has the required skills and time, both being of essence to have a 360-degree view of debt markets, should he invest on his own in debt mutual funds. Otherwise, he should take the advice of a Sebi-registered adviser


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