“Everyone is sounding like a stuck tape these days – invest in short term debt schemes, they keep repeating. This is happening at a time when everyone is talking about the great prospects of medium-term funds,” says a mutual fund advisor, who does not want to be identified. “Even if an investor has a slightly higher horizon, many advisors are not recommending these schemes. They are repeating the standard advice of invest in short-term debt funds.”
The advisor is right. The standard advice for debt investors has remained the same in the last two years or so: stick to short term debt funds. This hasn’t changed even while the central bank was cutting rates. It has not changed even after RBI started holding rates. Why? Because of two reasons.
One, even when the RBI was unwinding rates the market sentiment remained cautious. Nobody was sure how long the easy money policy would continue. After the Covid pandemic, everyone is second-guessing what the central bankers across the world are going to do. Though there is an unanimity that the apex banks would keep liquidity sufficient to support growth, nobody is sure what will happen in the long-term.
Two, mutual fund advisors are playing it extremely safe after the recent setbacks in the debt mutual fund space. The debt mutual fund universe was rocked by downgrades, defaults, unilateral deals, among others in the last two years. The franklin fiasco was the last in a series of episodes that eroded investor confidence in debt schemes. In this background, many advisors are not willing to recommend anything risky to the investors.
Advisors say most debt investors have already shifted to extremely safe options or shifted to bank deposits. Another blow could be too much for them to handle at this juncture. This is the reason why advisors are not keen to recommend medium duration funds to their clients.
Medium duration schemes have the Sebi mandate to invest in securities with a Macaulay duration of three to four years. The category has given an average return of 6.26% in the last year, according to mutual fund tracking firm Value Research. Around nine toppers have managed to offer more than 10% returns. SBI Magnum Medium Duration Fund, the topper in the category, has offered 13.30% in the last one year.
A quick look at the portfolio of the toppers reveal they have large exposure to AA-rated securities. They also have investments in A and below rated securities. Obviously, these schemes have a higher risk element in them. Advisors are indeed right that they are suitable only for bravehearts who can withstand shocks from their debt mutual fund investments.