The incredulous 7% fall in the NAV of Taurus Liquid Fund due to a credit rating downgrade has many worried. Can investors avoid such funds? Is this a "small amc" problem? Is this a small aum problem? I thought liquid funds were safe! Just a sample of how many investors feel. In this post, I discuss these issues and how to minimise risk associated with liquid funds.
First, let us get the obvious out of the way. No mutual fund is safe. Risk cannot be avoided (without enhancing other types of risk) and can only be minimised.
Here we go again! Yet another AMC has been caught on the wrong foot with one of its bonds downgraded in value. This time it is Taurus Mutual Fund which held at least 65 crores of Ballarpur short-term bonds in four of its funds. In what was a probably a first for the Indian industry, Taurus liquid (a five-star rated fund by VR (direct)) fell by an astounding ~ 7.2%.
As Ashal pointed out at Asan Ideas For Wealth, this means that at the time of the crash, the holding was much higher than the 4% shown at VR. The other funds that fell are the Taurus short-term, ultra-short-term and dynamic income funds.
The great tragedy in the mutual fund space is the temporary closure of DSP BlackRock Micro Cap Fund. So what is the alternative to DSP Microcap? Some common sense perhaps? Maybe asset allocation? No, that is not an attempt at humour, I am serious. Anyways, here is a couple of real alternatives to DSP Microcap until the great fund opens again and why I am not so keen to invest in such funds.
Well, I am keen, but will not have an exposure of more than 10%. Who does not like returns? But risk is the shadow of returns, and managing my portfolio would be harder with the kind of risk these funds pose. Sorry, I don't buy the statements like:
There are two main risks associated with a debt mutual fund: capital losses due to (1) an increase in interest rates since old bonds are not as valuables as new bonds that offer higher rates; (2) an actual default in the payment of interest or the possibility of default. In this post, I shall introduce a little-known class of fixed income funds - the floating rate debt mutual fund and discuss how it reduces interest rate risk.
Investors who wish to give debt mutual funds a try often find that they are more difficult to understand than equity mutual funds 🙂 Who would have thought a fixed income product (a bond that offers regular payments like a fixed deposits) would be so hard to understand the moment it can be traded to another party in the middle of its tenure! But that is how it is. In this post, I discuss the types of debt mutual funds available and why it is so hard to choose a category, let alone a debt fund from a category!