YOUR MONEY

THE year 2015-16 has been eventful for both equity and debt instruments. Banks have declared the list of wilful defaulters and there were downgrades of credit papers of major corporates, which had a ripple effect on debt mutual fund investments outlook. Markets regulator Sebi came out with more detailed instructions on the credit ratings being carried out by mutual fund houses.

In such a scenario, it is very important that an investor must know the instruments he chooses to invest. One must know the quality of underlying papers invested by the fund houses. As a double whammy, the government reduced the interest rates on all small savings schemes. They were very popular, especially among senior citizens, for assured returns. So, how do you ensure that the returns are not subject to surprises and there is certainty of income.

Checklist for investment

While investing in debt instruments, it is important to know where the money is invested. High returns excite all and it is the main factor that most investors consider. Investors must look at credit risk. If there is a possibility of the principal amount not being returned back, the existence of credit risk is prevalent. Credit risk also could be a default risk. The risk of the corporate default- at the pre-determined time or getting the principal amount back, albeit at a discount. The loss or haircut is not acceptable to any investor. Liquidity is basically the cash flow you need and shortterm requirements should not be earmarked to long-term instruments. If you have a cash flow requirement in three months' time, you will not try to invest in accrual funds, with paper having a maturity of 18 months.

Every fixed-income investor will have to live with interest rate risk. In a falling interest rate scenario, the investor has to bear the lower rates. This becomes more prevalent at the time of reinvest-