The Mutual Fund Show: How Should Investors Approach Debt Mutual Funds? – BloombergQuint

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After the markets nosedived last week and the concerns surrounding insolvent infrastructure firm Infrastructure Leasing & Financial Services Ltd., debt mutual fund investors would be worrying about their money.

There is some sense of panic as corporates invested in liquid funds get rattled even with a day of negative returns, said Dhruv Mehta, chairman of Foundation of Independent Financial Advisors, on BloombergQuint’s weekly series The Mutual Fund Show.

Some funds with exposure to IL&FS have shown negative returns over one to three months and this adds to the uncertainty, he said. “There has never been the instance of a AAA paper defaulting though the interest rate spike in 2008 led to mark-to-market losses. However, a credit risk would be difficult for the market to digest.”

Duration and credit risk are the two factors an investor must study before selecting and investing in debt funds, said Tarun Birani, founder of Birain suggested investing in AAA-rated accrual funds at current levels.

While Birani suggested incremental investments for the next 3-6 months in the ultra-short-term category, Mehta pitched for investing in overnight funds for the same time duration.