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Dear Investor, Not All Debt Funds Are Doing Badly

Author: Kumar Shankar Roy/Wednesday, May 13, 2020/Categories: Exclusive

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Dear Investor, Not All Debt Funds Are Doing Badly

Due to the Franklin Templeton MF’s move to wind up six debt funds, there is a perception being created that all debt funds are bad and are risky. Data doesn’t support such a perception. Most of the biggest debt funds, where most of the investment of the general public is focused, in the last one year have generated good returns. Hence, investors should not panic and start pulling out funds from all debt/ fixed income schemes. Here are more details.

Franklin Event

Franklin Templeton Mutual Fund is winding down six of its debt funds with a combined investor assets of nearly Rs26,000 crore. This comes after the fund-house had side pocketed funds in January due to exposure to Vodafone-Idea. The investors in the six funds - Franklin India Ultra Short Bond Fund, Franklin India Low Duration Fund, Franklin India Short Term Income Plan, Franklin India Income Opportunities Fund, Franklin India Credit Risk Fund and Franklin India Dynamic Accrual Fund – can’t do any transactions or redeem their investments. As with everything else currently, it was triggered by the pandemic-driven liquidity crisis.

To meet the increased redemption by investors, the fund-house had to start borrowing from banks which couldn’t be sustained when it reached its maximum limit. It appears that the fund-house had gone a little too far with risky assets. The riskier the asset, the more difficult it is to find a buyer for it during a crisis period.

This event has led to sentiments for most debt mutual fund categories remaining muted due to worries of liquidity and credit quality amid the Covid-19 pandemic and lockdown. Closure of a few debt schemes by FT due to these worries also added to the negative sentiment. Credit risk funds were the worst affected seeing outflows of Rs19,200 crore, highest for the category since April 2019. Medium duration, short duration, money market, low duration and ultra -short duration categories also saw major outflows of Rs 6,400 crore, Rs 2,300 crore, Rs1,200 crore, Rs 6,800 crore, and Rs 3,400 crore, respectively.

Fair Comparison

How fair is this fear that other debt funds are hiding skeletons in their closet? If you look at returns, the investment experience for a majority of investors has not been affected in the last one year. Let us take a closer look. Before beginning, know one thing that a large part of the total investors’ money in debt funds is concentrated in 5-6 biggest funds.

About 70 per cent of a debt category’s schemes are typically in the largest funds. And, these largest debt funds have not done badly. For instance, the five biggest Gilt funds have delivered 16.40 per cent 1-year average return, with the largest fund SBI Magnum Gilt delivering 18.21 per cent gain.

In the corporate bond fund category, the five biggest funds have delivered 10.40 per cent average return in one year, with the largest scheme ABSL Corporate Bond Fund giving 10.67 per cent return.

In the short duration fund category, the biggest funds have given 10.13 per cent average return in one-year period, with the largest scheme ICICI Prudential Short Term Fund generating 9.91 per cent in the same period.

In the Banking and PSU category, the largest funds have delivered an average 11.07 per cent gain in one year, with the biggest fund Axis Banking & PSU Debt Fund giving 10.58 per cent gain in the same period.

In the Credit Risk category, despite the bad press and negative events, the biggest funds in one year have gained by an average 7.05 per cent, with the biggest fund HDFC Credit Risk Fund  also delivering similar return. Large sized fund that was excluded for negative returns or fund with near zero percent return are Aditya Birla Credit Risk Fund, Nippon Credit Risk Fund and L&T Credit Risk Fund.

In the Medium Duration segment, the biggest schemes on an average have given 8.77 per cent return in one year, with the biggest fund ICICI Prudential Medium Term Fund delivering 9.09 per cent in the same period. Large sized fund that was excluded for negative returns or fund with near zero percent return are Aditya Birla Medium Term Fund, and Nippon India Strategic Debt Fund.

A similar picture can be seen in Dynamic Bond category (8.77%), Medium to Long Duration category (14.74%) and Long Duration category (12.53%). The biggest funds in each category have delivered solid returns, which mean most investors have had a good investing experience. 

Hence, investors should not paint every debt scheme in the same brush. The regulatory landscape is also getting better with each negative event. “Measures taken by Sebi over the years including one in October 19 have deepened the Debt markets. Mutual Funds have carried out business as usual including meeting redemption in current challenging times as markets are open and functioning,” says AMFI chief executive NS Venkatesh.

The writer is a journalist with 14 years of experience

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