Econony turning around! Should you look at debt funds ?

Such turning points of the economy are when this category of funds makes their money, and how! These mutual fund schemes look for opportunities in the fixed income market, debt and money market instruments in particular, and invest across the credit spectrum.

Jul 10, 2015 06:07 IST India Infoline News Service

Debt Fund
Risk-averse investors who look for opportunities in debt products can look at credit opportunity funds, which are good bets to put your money on when the economy is on an unswing, the interest rate trajectory has begun its downward spiral and the health of corporate India is improving.
 
Such turning points of the economy are when this category of funds makes their money, and how! These mutual fund schemes look for opportunities in the fixed income market, debt and money market instruments in particular, and invest across the credit spectrum. But they make money essentially from an upgrade in credit rating of companies or by investing in low-rated debt instruments, which being slightly riskier instruments offer higher returns, read coupon rates.
 
These funds have slightly longer tenures of six months to two years compared with short-term debt funds, but in terms of liquidity, they are very liquid and provide comparatively better returns. These products are ideally good for investors with an investment horizon of one year or more.
 
Investors with moderate risk appetite who look to invest in fixed coupon-bearing instrument like corporate deposits and fixed maturity plans can look at these products. These are also great options to lock in a lumpsum amount for a small period as they offer reasonably attractive yields compared with other fixed income options.
 
Yes, these funds are slightly riskier, as unlike a gilt fund and income fund, which invest largely in AAA-rated papers, they invest across the credit spectrum, which is why they also usually earn you bigger returns.  Also, these funds try to mitigate those risks by balancing out the portfolio with some top-rated papers. Also, investors can ensure themselves remarkable safety by choosing the right fund house and going for better diversification.
 
These funds can also be a good opportunity for investors looking to go for systematic investment in debt instruments, as they allow you to bring in money in small tranches, which may not be possible in case one opts for debentures.
 
The Reserve Bank of India (RBI) has cut policy rates thrice this year and some analysts believe the central bank may go in for another rate cut by about 25 basis points. Given this situation, traditional income and gilt funds provide little opportunity for capital appreciation. But in a falling interest rate environment and when the economic cycle is looking up, corporate credit profiles usually tend to improve and so are the prospects of returns on their debt papers. This is what makes a strong case for credit opportunity funds.

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