What next, and what should we do? That’s the question savers are asking after Franklin Templeton stunned Mumbai’s financial community late Thursday, announcing the seizure of six debt plans that cumulatively managed Rs 26,000 crore of investor money.
Experts believe investors in the fixed income space with a higher allocation to credit funds or lower-rated paper could shift to overnight, liquid and arbitrage funds to lower their exposure risk in the current environment. Investors seeking a long-term allocation to debt could also move money to government bonds, which are safe and offer 7.75% interest. The objective should be to ensure safety of capital instead of high returns.
“If you have a short-term time frame of 1-2 years, it is best to stay with overnight or liquid funds,” says Jitendra Solanki, a Sebi-registered investment advisors. Overnight funds invest in CBLOs, overnight reverse repos, and other debt or money market securities that mature in one day.
Liquid funds invest in short-term money market instruments. Solanki believes that these schemes carry high quality paper which is liquid and, hence, investors would be better off here.
Some financial planners suggest investors, who do not need liquidity but just allocate to debt mutual fund schemes as part of their fixed income portfolios, could opt for the 7.75% GOI bond. “The GOI bond issued by the RBI is one of the safest investments that one can get in today’s environment and earn as high as 7.75%. The government has yet not cut rates here even though small savings are down,” says Vikram Dalal, MD, Synergee Capital.
Dalal points out that although returns are high, this scheme is illiquid and has a tenure of 7 years. Also, the interest income will be subject to tax and such income is not eligible for indexation benefits.
Financial planners are asking fixed income investors to choose fund houses with a strong track record when it comes to debt funds. “In the case of debt funds, bet with conservative fund houses that go for safety over return,” says Anup Bhaiya, MD and CEO, Money Honey Financial Services. He advises investors to be with bank fund houses and schemes that have large assets under management.
Financial planners believe it is time for investors to take a look at their overall mutual fund portfolio in line with their risk profile. Opt out of credit risk funds if you have high exposure or your time frame of investment is low.
Schemes on death row
|Fund name||1-year return||Assets (in Rs crores)|
|Franklin India Low Duration Fund||-4.76%||2,737|
|Franklin India Dynamic Accrual Fund||0.64%||3,119|
|Franklin India Credit Risk Fund||-3.83%||4,434|
|Franklin India Short Term Income Plan||-3.31%||7,093|
|Franklin India Ultra Short Bond Fund||4.33%||10,964|
|Franklin India Income Opportunities fund||0.32%||2,506|
Returns as on April 23,2020; assets as on March 31, 2020
Source: Value Research