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‘#AskHansi’: How safe is a debt mutual fund?

Yahoo, in association with Hansi Mehrotra, presents ‘#AskHansi’, a new series to help you get a better grasp of personal finance and how you can invest smartly.

Hansi Mehrotra, a CFA with global experience and founder of The Money Hans, is a celebrity in the world of personal finance in India. A powerful influencer on in the corporate/banking/finance circles. She creates fine personal finance content that simplifies complex issues into easy-to-understand stuff which lay people can identify with.

Q - How safe is a debt mutual fund?

A - Another way to ask the question is how risky is a debt mutual fund. And by risk, I assume you mean - can the value of your capital investment fall? The short answer yes it can, but usually it's for the short term.

Why? Because your mutual fund has invested in a whole bunch of listed securities, where, on a temporary basis usually, the market values fall reflecting interest rates, liquidity, credit squeezes, credit default in that company or its competitors or in the market generally, elections, a whole bunch of factors.

The fund managers are usually skilled enough to assess that risk. And the lower the credit rating of the securities, the higher number of securities they should have in the portfolio. So if they are AAA, maybe 20 to 30 securities might be fine. If it's any lower quality than that, there should be a hundred securities, even 200 securities. In India, there might not be that many securities available, hence that's a risk, therefore you need to assess very carefully.

So, the short answer - It's possible the value falls on a temporary basis, but you need to assess the credit rating and the fund managers skill. And yes, the limited number of securities on issue in the Indian market is a concern.

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How risky are debt funds?