Monitoring the debt mutual fund space of clients

Monitoring the debt mutual fund space of clients

Mutual fund advisors are regularly asking their clients to either sell or stop their investments in debt schemes. This is because they believe that this is too much of a risk in the present market scenario. 

A financial planner, who did not want to be named, did mention that in his opinion, investors would perhaps be unable to stomach another Franklin kind of situation. This is precisely why so many clients are being advised on taking their money out of certain schemes, and completely stopping investments in the other. 

When it comes to their risk profile, a lot of debt mutual fund investors are conservative. They are also very mindful of their capital preservation and the extra 1% returns. The sudden and unexpected decision of Franklin Templeton Mutual Funds to shut down six of its debt mutual fund schemes has come across as a huge shock to investors who had invested in the scheme to take care of certain short-term needs. These investors are also highly disappointed in how they will have to wait till the fund house finds a solution to their issue, and their consequent inability to sell their investments. 

Franklin Templeton has announced its decision to wind up six of its debt schemes on April 23. The decision came in the wake of the coronavirus pandemic, and the severe liquidity issues that popped up in the bond market as an aftermath of the lockdown. Amidst such a risk-averse market, the fund house could not find any buyers for their lower-rated bonds to meet the redemption pressure, and hence the decision. 

Even before the Franklin episode, financial investors were anyway asking investors to stay safe and stick to safer schemes. Now is the time to be extra careful. A lot of investors did manage to shift their riskier debt funds earlier this year, or even in the previous year. Others are now being advised to keep their short term money in cash and bank accounts. If you have a longer investment horizon and a higher risk appetite, it would be better to go for liquid funds. If you can expand for up to three years, go for corporate funds. 

Moreover, a lot of mutual funds advisors have already told a lot of their clients about not chasing returns in the debt mutual fund space. Many of them have also been asking their clients to not look beyond overnight funds, banking and PSU funds or liquid funds for shorter periods. Even within these categories, advisors are emphasizing on the importance of safety rather than of returns. 

At this point, it does not make sense to opt for high risk and high return investments in the debt mutual fund space. The risk-reward is not in favor of investors at the present moment. Investors should stick to gilt funds for longer-term horizons, and banking and PSU funds for shorter investment horizons. Though liquid funds are safe, they too have their own set of risks.