Are Mutual Funds Worth The Risk?

Debt funds have eroded substantial investor wealth over the past few months. Are they worth the risk?

- Renu Yadav

Mutual fund assets under management have almost doubled to 23.42 lakh crore in the past three years. Although the growth has been led by equity funds, the largest chunk of mutual fund money is still parked in debt funds — they account for more than half the assets and have seen 48 per cent absolute growth over the past three years, as per data provided by Icra Online. Although institutional investors are the major holders, retail investors have also been increasing their exposure to debt funds over the past few years to beat the low bank fixed deposit rates. Individual investors’ share in debt funds (retail and high net worth individuals) has gone up from 28 per cent to 32 per cent in the past three years as debt fund returned more than fixed deposit rates in 2016.

All this has changed over the past few quarters. Debt mutual funds have suffered massive losses that have wiped off half the value of some funds in a single day (See Unprecedented Losses). The trigger has been defaults by some big names in the non-banking finance company (NBFC) sector and lowering of ratings of papers issued by a number of NBFCs. In fact, after IL&FS defaulted on its loans, some liquid funds (considered safe) delivered negative returns to the tune of 5 per cent in a day. This has shaken the confidence of investors. Does all this makes debt funds a bad option?

How it Started

Financial planners advise you to have some allocation to debt funds as they are less risky than equities. “The role of a debt fund is to meet shortterm goals and provide a cushion to the portfolio. We need to ensure that the money invested in debt has some capital protection and liquidity,” says Shweta Jain, Founder, Investography.