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Debt mutual funds: good bet, but trade carefully

There are different kinds of debt-oriented mutual funds in the market and investors have put large amounts in these schemes. Arnav Pandya tells us more...

india Updated: Jun 30, 2008 22:06 IST

There are different kinds of debt-oriented mutual funds in the market and investors have put large amounts in these schemes.

With conditions in the debt market becoming tougher, it is important for investors to understand the factors influencing the movement of the net asset values (NAV) of their schemes. There are reports about valuation of bonds and other assets that do not have a liquid market and hence the investors have to be alert to sudden change that can impact their investment.

Traded and untraded instruments

Debt-oriented mutual fund instruments come in various types. Many mutual fund investors go for corporate bonds and government securities are regularly traded in the debt markets.

This means that there instruments are readily available for sale and purchase and hence it is also easier to value them.
There are other instruments like non-convertible debentures or even floating rate instruments called ‘floaters’ that do not have a liquid market and their prices are not regularly known. This makes the valuation of these instruments difficult and it can lead to an impact as far as the NAV of the scheme is concerned.

Valuation parameter

Often there are some trades in these instruments, taking their valuation higher that what would normally be. This will result in a pass through effect coming to the NAV of the scheme and the investor will feel that they are actually earning higher returns.

The situation can turn very easily if the fund actually has to go and sell the instrument in the market because the price at which it will be able to sell it to some interested party will be quite less. This can impact the returns that are available in the scheme for investors who might suddenly find that there has been a major change in the situation.

Portfolio watch

It is very difficult to know and track the schemes, because unlike equities there is no regular price available for the investor to compare the portfolio holdings at the end of each day.

This is something investors are not used to and will need to rely on some measures to look out for risks. This can be evaluated by seeing whether they have investments in schemes where there are floating rate instruments present in the portfolio. The mere presence of such instruments does not mean a risk but investors will know where they need to keep a careful eye.