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Review of Debt Fund Investments: The Need of the Hour

At this critical juncture, it is important that we identify those funds or instruments which expose the portfolio to excessive credit risk and eliminate them. It is also important that we replace some of the bad apples, with suitable products which provide appropriate risk-return trade-off.

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The pressure on long term yields is more visible today as compared to the last few months. The hardening of yields is the direct outcome of the expectations of large primary issues that are likely to hit the markets and this would push the yields higher. A major portion of the total issues of government securities is at the long end of the curve, and this would make the existing investors unload the current holdings and pick up the fresh issues.

The environment from the policy perspective is quite all right. The RBI has cut the repo rate twice in quick succession, the policy stance remains neutral. While it cannot be ruled out that RBI may not cut rates further, price level pressures may gradually develop over the next few months due to multiple factors, which may include the rise in oil prices as also a relatively weaker Rupee. Due to summer, the prices of fruits and vegetables generally show a rising trend during this time. RBI continues to fight the chronic liquidity deficit through Repos and OMOs. Given these immediate factors, it is less likely that RBI would go in for aggressive rate cuts and may also take a pause. The requirements of the growth would remain a valid concern as growth rate is likely to be lower going by several projections.

This brings into focus two prominent risks, of which, the first is price risk. Against the background of what is discussed above, it is important to insulate portfolios from price risk. The insulation can happen if we move to the short end of the curve or short- term products where the level of price risk will be low or negligible. That is, we need to focus on short duration products for investments, and products from the corporate bond funds space, with a good quality portfolio. The short duration will limit the price risk, and the selection of portfolios with good quality would contain credit risk to a substantial extent. This is an avenue which investors who are debt-oriented or who have a preference for fixed income may focus on, at this juncture. 

The second and somewhat more critical risk faced today is credit risk. This risk has come to the fore due to several events which started with the IL&FS default, and later due to a credit crunch and liquidity issues basically emerging from the asset-liability mismatch of the NBFCs, mainly the real estate and housing companies. The conditions have improved to some extent but the fear of new problems coming up due to the adverse liquidity conditions still continues. There have been some other credit risk issues also very recently. This calls for greater due diligence on the instruments and products chosen for investments. Credit risk is directly present in the credit risk funds and also in funds which have a higher component of instruments which are rated AA- and A and lower.

At this critical juncture, it is important that we identify those funds or instruments which expose the portfolio to excessive credit risk and eliminate them. It is also important that we replace some of the bad apples, with suitable products which provide appropriate risk-return trade-off. This is possible only through objective portfolio reviews.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Bhavesh Sanghvi

The author is CEO, Emkay Wealth Management

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