Taking benefit of low Bank FD interest and low/negative return on equity mutual funds, many MF agents are marketing medium/long duration funds for low risk investments. However, they may not be a good investment for you on Risk Adjusted Basis.
1. Never Invest In Debt Funds Based On Past Returns
a. High Past returns: Certain debt funds in medium term or long term category have given higher return recently as the interest rates and yields have decreased (8-9% to 6%). Some funds even genrated double digit returns over last few years.
b. Past and Future returns inversely related: Generally, in long term or gilt (G-sec) debt funds, usually past and future returns are inverse and depend upon interest rate cycle. When interest rate goes down, return goes up and when interest rate goes up (over next 3 years), returns will come down. Even if interest rate stays the same (5-6%), the return would be 4-5% only assuming 1% expense ratio.
Currently, about 25-30% of all loans of public or private banks as well as of NBFCs are under moratorium. As a result, review of creditworthiness or rating downgrade can only be done after the end of moratorium on August 31, 2020, i.e. in September/ October.
How many of these companies would become NPA or be downgraded is to be seen. But when that happens, the price of debt securities would go down and so is the return.
How to invest in Debt Mutual Fund in Current Situation:
- Keep money in cash or bank FD until October 15 ( 1.5 months after moratorium) and decide accordingly.
- DO NOT invest in debt funds with duration of 3+ years with long term focus
- You may only be able to generate low single digit or even negative return if debt mutual funds were not selected wisely
- If you are an NRI,
- If funds in NRE account, have 1 year NRE FD or money in savings account
- If funds in NRO account, have FD for 3 months
- Decide about investing in debt mutual fund after 3 months
- Contact your advisor (not an agent) and invest as per his/her advice
Always Remember “Every investment is a good investment. The question is whether it is a good investment for YOU.”