Career Search

Thursday, August 3, 2017

Understanding Risk in Debt Mutual Funds

Debt Mutual Funds Online



Investors have made double digit returns in certain categories of debt funds over the last one year.
Financial planners suggest that investors be aware of the risks involved in debt funds and how mutual fund (MF) managers help lower these risks

1. What is interest rate risk?
How could it impact debt mutual fund investors?


Interest rate movement poses a risk to debt MF investors.

Interest rates typically rise when the economy is growing, and fall during economic downturns.Bond prices and interest rates are inversely related. When interest rates rise bond prices fall and vice versa.Usually , longer the maturity , greater the degree of price volatility . Interest rate risk is present in all debt funds but the degree could vary . Gilt funds with longer maturity , carry higher interest rate while it is negligible or very low in liquid funds, which invest in securities of up to 91 days maturity .

2. How can credit rating of a company affect a debt fund?


A credit risk is the risk of default on a debt security that may arise from a borrower failing to make required payments. If a default were to happen in the security of a portfolio, it would impact the fund to the extent of its weight in the portfolio. Bonds are assigned a credit rating by agencies such as Crisil, Care and Icra based on their ability to finance debt obligations and their cash flows. A corporate bond with an AAA equivalent rating is considered of the highest quality with negligible risk of default on payment of interest and repayment. Recently , Amtek Auto was downgraded by rating agencies, which affected debt fund schemes that had the paper in their portfolio. The fund manager regularly evaluates credit rating changes in the portfolio.

3. How crucial is liquidity & concentration for debt funds?


Concentration refers to the proportion of holding in one specific bond, higher the concentration in a particular security, higher the risk. For example, if you hold a 10% exposure in a single security and if it defaults, the NAV (net asset value) of the fund would fall to that extent. The fund manager also has to ensure the scheme is liquid to the extent that the fund has the ability to move in and out of a scheme without impacting its value or price. He ensures the scheme is liquid to manage large redemptions without having an impact on the NAV of the scheme.





-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saver Mutual Funds to invest in India for 2017

Best 10 ELSS Mutual Funds in India for 2017

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Religare Tax Plan

4. DSP BlackRock Tax Saver Fund

5. Franklin India TaxShield

6. ICICI Prudential Long Term Equity Fund

7. IDFC Tax Advantage (ELSS) Fund

8. Birla Sun Life Tax Relief 96

9. Reliance Tax Saver (ELSS) Fund

10. Birla Sun Life Tax Plan

Invest in Best Performing 2017 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

-----------------------------------------------

 

No comments: