How to build low-risk debt portfolio post Franklin fiasco4 min read . Updated: 04 May 2020, 11:48 PM IST
Experts say a combination of certain categories of debt funds along with other products can help build a low-risk debt portfolio
Investors rushed to redeem investments in credit risk funds after Franklin Templeton Mutual Fund shut six of its debt schemes. Within three trading days of the announcement, ₹9,000 crore was withdrawn from the category as investors were scared that their funds could meet the same fate, given that low-rated papers are difficult to liquidate right now. If you are among those looking for low-risk assets, don’t just settle for fixed deposits and savings bank accounts. Experts told Tinesh Bhasin that a combination of certain categories of debt funds along with other products can help build a low-risk debt portfolio
Deepesh Raghaw, Founder, PersonalFinancePlan
If you want no risk at all, invest in PPF, EPF, FDs and SCSS
Despite the Franklin fiasco, debt mutual funds remain fine products, but you need to select the right scheme. Investors can’t just pick up funds based on past returns or star ratings. For asset management companies, business compulsions might be in conflict with investor interest. Therefore, you cannot take their communications at face value. Asset management companies (AMCs) cannot customize products for each investor. They can only offer a basket of products. It is the investor or the adviser’s job to select the right product.
Choose products that align with your risk profile. Prefer funds with low credit and interest rate risks. Almost all debt MFs carry an element of risk. To eliminate this, look at Public Provident Fund (PPF) and Employees’ Provident Fund (EPF) for long-term portfolios. For income needs, look at bank fixed deposits (FDs), Reserve Bank of India (RBI) savings bonds, Senior Citizens Savings Scheme (SCSS) or tax-free bonds. Some of these are long-tenured, and you can face liquidity problems. Also, the returns from most safe products are not as tax-efficient as debt MFs.
Kartik Jhaveri, Founder and director, Transcend Consulting
Investors can look at money market funds, tax-free bonds
The Franklin event has again reminded us that one should be prudent instead of being greedy. There were signs over the last 18 months of the lurking danger in such funds. Most private wealth managers would have moved away from such funds long ago. Debt funds have always been an integral part of investors’ portfolio. There is a wide variety of choices available when it comes to debt funds. You can choose portfolios delivering returns in the 5-10% range and higher.
Conservative investors can look at money market funds, overnight funds and tax-free bonds. Those willing to take some risk can look at gilt funds and perpetual bonds. These investments would be volatile, and there can be 2-5% fluctuation in the capital as well. For gilt funds, the investment tenure must be at least four-five years as they are volatile. Look at perpetual bonds of public sector banks as they are backed by the government. Since they don’t have a maturity date, investors will need to sell them in the secondary market. For the rest, options such as bank and PSU funds, savings funds and FDs would work well.
Melvin Joseph, Founder, Finvin Financial Planner
Debt funds are still good bets for those in higher tax slab
There was a belief among investors that debt funds are safe just like FDs. That’s not true. All debt funds carry risk. But the extent of risk varies between different types of funds. The Franklin incident has created panic among investors who invested in debt funds without knowing the risk involved.
Debt funds are still a good option, especially for those in the higher tax slab because of the indexation benefits. For retail investors, the first choice in debt should be PPF, Voluntary Provident Fund (VPF) and schemes like Sukanya Samriddhi Yojana. The seven-year RBI bonds offering 7.75% are also a good option. Only if there is a need for more debt, as per the asset allocation, should they consider debt funds. Investors can look at overnight, liquid and well-managed and diversified ultra short-term funds. The portfolio of these funds should have AAA-rated securities and government bonds.
There is no need to exit from debt funds in panic. Some fund houses go a bit aggressive in investing in low-rated securities to generate extra return. But investors should take risk in equity, and not in debt.
Malhar Majumder, Partner, Positive Vibes Consulting and Advisory
Small savings schemes will lower risk, but affect liquidity
One of the biggest virtues of mutual funds is liquidity. Investors get back their investment in a matter of days. The Franklin event showed that an open-ended fund may freeze payments by taking approval from the trustees and the regulators. This shook the confidence of investors.
But this doesn’t mean investors need to redeem all other debt funds. There are different categories of debt funds that have different risks. Investors need to match their objectives with that of the category’s and then of the scheme’s.
In case you want to lower your risk or don’t take risk at all, there are multiple options that you can add to your debt portfolio. You can look at Kisan Vikas Patra, National Savings Certificate and other products in small savings schemes, though you would be trading liquidity for safety in such instruments. Then there are RBI bonds and company FDs of AAA-rated companies. But invest in company FDs only under guidance. Overnight funds and liquid funds are relatively safe. Those who are willing to take a bit of risk and want to invest for the long term can opt for bank and PSU funds.