Hello Readers! 

Do you invest directly in bonds or indirectly by investing in Debt Mutual Funds? have you enquired about credit risk associated with your investment in bond or debt mutual funds, by an advisor?

If yes, good for you, and if not then read the blog to know about the credit risk and how it is linked to your investment.  

Credit Risk is referred to as the risk associated with poor-quality bonds, where people who invest may face a situation where either interest payments or principal repayment or both may suffer due to cash flow issues. If you are a debt investor, you might think that how will credit risk effect you then you must know that the debt mutual funds scheme you invest in also buy bonds and they might invest in low-quality bonds.

You might have heard about the fiasco in Franklin Templeton’s debt schemes. The funds got wound up and investors can’t exit.

Here is what you need to be on the lookout for, to avoid taking too much risk in your debt fund.

Select Based On Quality

The debt fund is rated as AAA, AA, A, and so on. On can easily check out the ratings of debt funds that are released in their portfolio every month. You can easily get this on the fund’s website.

Among all, debt funds that are rated as AAA are the highest-rated credit which means the safest bonds in terms of repayment of principal and timely interest payments. Funds with AAA ratings are generally Government-issued bonds. For these bonds, repayment is not concerned and thus Fund managers buy lower-rated bonds as they come with a higher yield or interest payment.

That’s why scheme selection plays a major key role. Where you are certain you want zero risks in your debt exposure, only choose funds with 100% AAA bonds.

Look At Concentration

The other aspect you must look at is the concentration of the fund or the amount the fund invests in one particular bond. A high concentration to one bond makes the outcome riskier when it comes to selling that bond. Avoid funds with high exposures to a single bond. However, high exposure to Government bonds is fine as they can be sold easily in the secondary market.

So basically, while choosing debt funds for you to invest, make yourself clear with the risk associated with these funds. You can also ask your financial advisor to make you clear about these risks.

For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).