Taurus’ debt fund price dips sharply. Should you worry?
Debt funds were supposed to be safe, but when Taurus Asset Management Co Ltd’s four debt mutual funds dropped sharply, it spooked investors. On February 22, net asset values of four of its debt schemes fell sharply in just a day. Taurus Dynamic Income Fund — a long-term bond fund— was the worst hit as it fell by 11.82% in a day. Why? The credit rating of Ballarpur Industries Ltd — one of the companies in which its debt schemes had invested in — got downgraded on February 22 by India Ratings & Research. So should you be worried? Are debt funds as risky as equity funds?
WHAT HAPPENED?
When you invest your money in an equity fund, it buys shares of a company and hopes that their prices go up. If you invest in a debt fund, your fund invests in debt scrips of companies and — in return — is paid interest. Simply put, debt scrips are loans given to companies. Mutual funds have emerged as one of the biggest lenders to firms, apart from banks. In return, the companies pay interest to debt funds. When the loan’s tenure is over, the company returns the principal back.
According to India Ratings & Research: “the downgrade reflects delays in debt servicing by the company...” Calls and text messages to Waqar Naqvi,CEO of Taurus AMC and its fixed income fund management did not elicit a response. India Ratings & Research, too, didn’t answer calls. Calls and text messages sent to B Hariharan, group director of finance at Avantha Group that owns Ballarpur Industries, did not elicit any response.
WHAT SHOULD YOU DO?
All mutual fund schemes carry risks. That’s why they have the potential to give returns higher than traditional instruments such as fixed deposits. But it’s your fund manager’s job to mitigate the risks. For instance, a well-managed debt fund invests a large chunk in high rated securities, unless it is the scheme’s mandate to invest low-rated securities. Taurus Short-Term Income Fund and Taurus Dynamic Income Fund had invested close to 12% each in this scrip. According to the rules, your debt fund can invest up to 10% maximum in a single company’s scrip, but can increase it to 12% if it gets the trustees’ approval. This means that two of Taurus’ schemes had almost maximised it limits..
CAN YOU AVOID RISKS?
Gurgaon-based Ashish Chadha, a mutual fund distributor says every mutual fund is vulnerable. But that doesn’t mean you should avoid debt funds. Chadha advises investors to diversify among mutual fund houses and not to invest beyond one scheme per house.