Is Your 'Safe' Money in Debt Funds? Read this... Friday, Jul 31, 2020
In this special Q&A session with our Fund Manager Pankaj Pathak, we asked him 5 most commonly asked questions by our investors. Read on to know what points you need to keep in mind before investing in a debt/liquid fund.
1. Many investors look at good ratings before investing in a fund. Recent times have proven that even 5 star rated debt funds have faced defaults. What are your views on liquid fund ratings and how important a metric is this to consider before choosing a fund to invest in?
I see two major problems with the fund rating system especially with respect to debt funds rating. First these ratings are biased towards past returns. So a fund which takes higher risks to enhance returns can easily get a higher rating.
The other problem is that many of the rating systems use insufficient or rather wrong measures of risk. Volatility of NAV or the statistical measures of standard deviation does not fully reflect the risks in case of debt funds. It does not capture the level of credit or liquidity risk in the fund.
Now understand in case of short maturity funds like liquid funds, the only way to generate higher returns is to take higher risks in terms of compromise on liquidity or credit profile. These funds could easily be top rated. So when investors rely only on the high star rated funds, there is a possibility that they choose a fund which is taking higher risk and can get into trouble if things go south.
2. In recent years, a few debt funds have defaulted. So have banks. In such a scenario where does a retail investor park his sacred funds, that he cannot afford to lose?
It's really unfortunate that investors have to face losses in their debt funds. But this was a harsh reminder that higher returns come with higher risks. The problems that debt funds have faced in the last two years is a direct consequence of ignoring the credit and liquidity risk for a long time.
Despite this, debt funds remain a good alternative for short term investment needs. However, we need to be extra careful in selecting a right fund.
For investors it's important to understand that purpose of investment in fixed income is not to maximize returns. Investors should priorities safety and liquidity over returns while investing in debt funds. We recommend retail investors to choose funds which invest into good credit quality debt like government securities or highly rated PSUs.
3. Quantum Liquid Fund, prioritizes safety and liquidity over returns? Given that you are a conservative fund house that carries minimal credit risk - why is it that your fund has a lower star rating?
Quantum Liquid Fund invests only into government securities and public sector companies. It has not invested into private corporate debt to avoid credit risk. This way the fund tries to keep the credit and liquidity risks to the minimal levels. But with this portfolio allocation it earns slightly lower returns compared to funds which take private credit exposure.
So the lower star rating of Quantum Liquid Fund is due to marginally lower returns but it ignores the fact that the fund carries relatively lower credit and liquidity risk.
4. Debt funds have gained good traction in these uncertain times of COVID-19. Why is this and where do you see debt funds headed in the near future?
Currently there is lot of liquidity sloshing around in the system and some of it is making its way into debt mutual funds.
Currently there is very high uncertainty around the economy and the financial markets. Debt funds are not immune to this. The future outlook depends on the policy choice by the RBI and the government. At this juncture my only recommendation to debt fund investor is to look for safety first and do not chase higher returns.
5. Is this the right time for investors to park money in liquid funds? How much % allocation should an investor assign towards this?
It is always a right time to save money by parking in liquid funds. This can be the first step in saving and based on one's risk appetite one can switch to other funds at an appropriate time to achieve optimal asset allocation.
The most important step of investing is to build the emergency fund and liquid funds have been an excellent instrument to accumulate this buffer. One should keep at least 6-12 months of expenses in liquid fund for emergency fund.
P.S.: To get a better insight on how Quantum Liquid Fund prioritizes safety and liquidity, watch this.
|Name of the Scheme||This product is suitable for investors who are seeking*||Riskometer|
|Quantum Liquid Fund|
An Open Ended Liquid Scheme
|• Income over the short term |
•nvestments in debt / money market instruments
Investors understand that their principal will be at Low risk
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