Know The Risks In Debt Mutual Funds

It is better to understand the nature and play safe while investing in these debt instruments

- Himali Patel

The turmoil in the debt funds space along with illiquidity issue in the credit markets has affected since the bankruptcy of IL&FS in September 2018. The onset of COVID-19 and the subsequent lockdown impacting the businesses has only added fuel to the fire in the credit market.

Further, in April 2020, Franklin Templeton (FT) Mutual Fund announced winding up of six of its credit-focused debt schemes. This was a rude shock to the entire debt mutual fund investors, who rushed to withdraw their investments from credit funds as well as other debt MF schemes. Although the debt-oriented categories witnessed a net inflow of ₹43,432 crore in April, the credit risk category, given its nature, was one of the worst-hit with a net outflow of ₹19,239 crore during the month. Investors in credit risk funds ran for exits after FT MF incident.

The uncertainty triggered by these events in the debt markets has not only restricted the fund houses’ ability to sell the securities but has made investors question fund houses whether to continue investing in debt funds or not. “When the economy is at the bottom levels and big crisis situations happen, like what we are facing today, the corporate bond markets become very illiquid. The price discovery and the trades happen mostly in OTC market which makes the depth also very poor. If there is a downgrade in any corporate debt paper, the instrument immediately becomes highly illiquid and will find no takers, this makes the life bit difficult,” explains George Heber Joseph, CEO and CIO, ITI MF.