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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.

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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.

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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.

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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!

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Here are some simple steps to avoid mess-ups when it comes to investing in debt mutual funds. Freefincal has 30+ posts on debt mutual funds. It is high-time that I compiled them into an e-book. I need to finish a couple of posts before I can do that. This is one of them.

Before we look at the features of the sheet, two quick announcements:

  1. V Ramesh, CEO of MF Utility will be joining Ashal and me at the Pune Investor Meet on Feb 26th. You can register via here. Only a few seats left.
  2. My book with PV Subramanyam, You Can Be Rich Too With Goal Based Investing is now available at a massive 30% discount of Rs. 278/- from amazon

If you are an absolute beginner, you can start here:  What is a Debt Mutual Fund?.  The second part is here: What To Look For When Buying A Debt Mutual Fund. All debt fund posts are listed here.

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