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Investing in debt funds? Go for high credit quality portfolios

Dhaval Kapadia
investing debt funds, maturity bond funds, RBI Monetary Policy Committee, Interest rate, maturity bonds, monthly

In the current context, are debt funds riskier than equity funds?

– Ganesh K Prasad

Equity funds are inherently more risky than debt funds, as is evident from the volatility that they have historically subjected investors to. The credit risk in a portfolio is in turn dependent on the underlying holdings in the portfolio. While investing in debt funds, one should look at the risks and rewards on offer. Funds investing in low rated papers offer a higher yield but have a higher probability of default. To reduce losses due to default, one should invest in high credit quality portfolios, having a diversified exposure to various issuers to avoid concentration to few issuers.

I am not too satisfied with my systematic investment plan's (SIP) returns for the past three years. Should I stop and move to another fund house?

—Pranit Madan

SIP enables an investor to average out the cost of his investments via disciplined purchases, particularly when the market is down. A fixed amount is invested in a scheme and investor gets units at current NAV. If markets rally, the NAV increases and investor gets fewer units for each subsequent SIP instalment. The reverse happens when the market corrects. When you accumulate units in a correction phase, you get more units while prices are down. Hence, you should continue your SIP if you are investing for the long term (more than seven to ten years) as you would benefit from buying units cheap. You should evaluate the performance of the fund vis-à-vis that of its respective category peers. If a fund has been performing poorly on a consistent basis, you may switch to a better performing one. Please consult your financial adviser for evaluating your portfolio in detail.

How can I invest in foreign funds to diversify my portfolio?

—S Gundappa

You may invest in the India domiciled international funds investing in foreign markets. We have funds investing in markets such as the U.S., Europe, Asia, China. Some funds invest directly in the foreign equity markets while others act a feeder fund to an international fund.Consult your financial adviser to evaluate suitability of the investment. In terms of taxation international equity funds are taxed as debt funds.

(The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com)