/Should investors redeem ‘risky debt funds’ and Franklin equity funds?

Should investors redeem ‘risky debt funds’ and Franklin equity funds?

Financial planner: SR Srinivasan, Founder, SriNivesh, a financial planning firm, based in Bengaluru.

Questions asked by investors:

1.Should we redeem our money from debt mutual funds?

2.Are Franklin’s other funds safe?

3.Should we move to FDs or safer funds?

His response to his clients:

For tax-efficiency and ease of use, we recommend a portion of your debt investments to be in debt mutual funds. Moving to FDs is for those who had no understanding of the risk they are taking for the returns. A debt mutual fund invests in a basket of tradeable bonds and deposits. A debt mutual fund is a market linked product and carries two primary risks – Credit Risk and Interest Rate Risk. There can be relatively safer option among debt funds but a totally safe market-related product.

If you understand the risk, stay in the schemes that you are investing. If you don’t understand how much your scheme can fall, it is better to move out. This decision should not be in isolation looking at the current situation. Don’t jump back to such schemes when things come back to normal. We had recommended to stay away from Credit Risk Funds last year.

During the accumulation phase, we look for debt funds that have the lowest possible credit risk and interest rate risk. Moving to liquid funds does not make your money totally safe. However, we select liquid funds that have a clear strategy on credit risk. Liquid funds are mandated to invest in securities with a maturity of 91 days or less; this limits the interest rate risk.

We should limit the credit risk by choosing funds that have a defined ‘style’. For example, Parag Parikh Liquid Fund invests mostly in government securities and Quantum Liquid Fund invests mostly in government and PSU securities. HDFC Liquid Fund has a large AUM and lowers default risk by investing in 100+ securities. Except for a small part of HDFC liquid which has corporate debt, these funds have restricted the holdings to money market instruments.

In some equity portfolios, we recommend Franklin Prima as a midcap fund. Our view on this fund has not changed. It has been a midcap fund for 26+ years and has consistent performance. Unlike debt funds, equity funds do not face pressures due to redemptions. They can sell the required parts of their entire list of stocks to meet redemptions. (The exception could be for very illiquid stocks, but these would be a very small part of the portfolio.) This move by Franklin doesn’t not impact the equity schemes.

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