With falling bank deposit rates, savers are hit hard and are looking at alternative avenues for earning regular returns. Among fixed income options, debt mutual funds, though prone to market risks, have the potential to generate higher returns. But the complex terms and jargons used in debt funds — ‘duration’, ‘credit call’ or ‘accrual strategy’ — often put off retail investors.

‘Managing your debt mutual fund investments’, a webinar held as part of SMART Investor series organised on Saturday by ICICI Prudential Mutual Fund and BusinessLine— sought to unravel the enigma behind debt mutual funds and decode key terms used while investing in these fund.

Debt MF advantage

Renu Narayan, Regional head - Karnataka, ICICI Prudential AMC, set the stage by highlighting the importance of fixed income investments in one’s portfolio and the advantages of debt mutual funds over traditional investment avenues— tax efficiency, higher liquidity and returns, better transparency and flexibility to invest across various time horizons.

Piyush Gupta, Director - Fund Research, CRISIL, explained the various categories of debt funds, what factors drive the NAVs of debt funds and the risks investors must take note of while investing in these funds.

The discussion was moderated by Radhika Merwin, Associate Editor, BusinessLine .

Stability, diversity

Gupta emphasised that debt mutual funds provide diversification and stability to overall portfolio apart from superior risk adjusted returns compared to a single asset class.

Debt mutual funds invest in fixed income securities such as bonds, government securities, and treasury bills, and are able to generate attractive returns. But unlike bank deposits the NAV of debt funds move up and down depending on interest rate movements and credit risk. Gupta said “There are two sources of returns for debt mutual funds - one is interest income which is accrued from the fixed income securities and second is capital appreciation which essentially adds to the volatility of NAV”.

So, if the interest rates move up, bond prices fall and vice versa. On the other hand, credit risk arises when a debt fund invests in low-credit-quality debt securities which may default on repayment. Gupta says “If you are not willing to take credit risk then some of the categories like Corporate bond funds and Banking and PSU Debt funds, can be considered. But the key is to monitor the underlying portfolio and reposition your portfolio accordingly”.

Renu Narayan elaborated on how investors can identify good risk management practice in debt funds to ensure a good investment experience. “There are four dimensions to risk management – liquidity, concentration, credit and duration management,” she explained.

Renu also emphasised that debt funds are suitable for all investors. She said “For a retired person, who will want to preserve wealth, short duration fund would be more suited. If there is requirement of regular cash flows from these investments, then one can opt for dividend option or systematic withdrawal plan”.

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