As if there was already not enough going on in the markets to impact investor’s portfolios, Franklin Templeton decided to wind down six debt funds including ultra short term funds meant for parking short term monies, leading to investors panicking on all their debt investments.
As it is, few investors understand how debt funds work and the difference in the various categories of debt funds. Even those who understand, fail to take action when they should. And when they lose money or access to it, they want the regulator or government to intervene.
Since the news on Templeton broke, I have had calls from so many people enquiring what to do. One person had his entire liquid holding meant for business purposes parked in the ultra short term fund because it gave better returns than other funds. Another person had invested in the low duration fund for his daughter’s marriage after following his chartered account’s advice on this fund, which was giving great returns.
The quest for high returns is where investors go wrong with their product choices. While investors can blame the fund managers and advisors (provided they have one), the onus of their decisions lies with them alone. In most cases, these funds were invested for the ‘higher’ returns they gave. Hopefully, now investors will understand the meaning of ‘greed kills’.
There have been many articles and blogs asking investors to check the fund portfolios, speak with their advisors but the reality is that most investors do not understand how debt funds work, why they do not give fixed returns, how can the returns go negative or how to decide which debt fund to go with.
Here is a simple guide on choosing debt funds:
Stick to certain categories like an overnight fund, liquid fund, ultra-short-term fund, banking, and PSU debt fund and short-term fund. Other categories like credit risk funds, dynamic bond funds, gilt funds are meant for more evolved investors, who can take the risks associated with these funds.
In the category chosen, invest in two to three funds for diversification.
While choosing funds, compare the expense ratio, and yield to maturity. This information is available in the fund factsheet. Generally, you will find that most funds will have yields and expense ratios in a range. Funds that have much higher quants should not be considered. Do not go by the performance of the fund. If you will not choose a cooperative bank fixed deposit over a larger private/nationalized bank fixed deposit, do not choose funds on the basis of past returns.
Compare the credit quality of the fund, that is the amount held by the funds in AAA bonds and below AA bonds. Clearly funds with a higher allocation to AAA bonds are preferred. After the default by AAA-rated companies like IL&FS and DHFL, funds have become more cautious with their holdings. Clearly the focus needs to be on the risks involved in the product over the returns.
Keep yourself abreast of the latest situation by spending some time reading some personal finance columns, especially if you do not have an advisor. For those who have advisors, the information learnt from the personal finance columns can be used to question the advisor.
Many investors feel very let down by fund managers during such times. Rightly so, because it is the fund manager’s duty to protect the investors’ interest. Thus, you need to look out for your money and not just forget about it once you invest it. You can control the way your investments are spread between various assets and then diversified further. Thus focusing on the right product choices, which are not just based on past returns is the key to building long term financial security with lower stress.