We have already told you (see Are Debt Mutual Funds or Debt Instruments Really Safe?) that there is little or no difference between debt funds, equity funds, and balanced funds of mutual funds when it comes to riskiness of the Fund. We all know that companies have defaulted on payment of principal and interest for many year on loans given by banks. The money on which default to banks has taken place amounts to lakhs of crores of rupees and is a matter of much discussion in the newspapers and media over the last couple of years. Investment in a company whether in shares or in debt is risky, without having to know at the second decimal digit the fractional difference in the Sharpe Ratio or Turner Ratio. So do not let a mutual fund adviser tell you that debt funds are as safe as life insurance endowment and also give better returns. Whether they give better returns or not is debatable. But they are most definitely not safe as an investment.

SEBI is also concerned

Now Business Standard (28 Sept 2017, The Smart Investor, page 1) reports that SEBI is seized of the same matter. SEBI has asked the mutual funds to monitor the risk inherent in their debt funds through specially formed independent committee to be overseen directly by the trustees of the fund. This action comes on the recent experience in the debt mutual fund sector. How independent a committee that is paid by the mutual fund will be is another matter. What is of interest is that debt funds are increasingly turning risky.

Some companies who have defaulted on repayment of debt

It is not the mutual fund or its managers who are at fault. Neither is it the company raising the debt in the first place. On the whole the economy is going through a bad phase and defaults on debt instruments will only rise. They cannot be contained. Those who wish to try their luck and take a few risks by investing in debt funds can do so – but entirely at their own peril.

Some Debt that is soon going to see BIG defaults

The mutual fund industry has invested heavily in the non-convertible debentures of NBFCs – a highly risky sector. As of 31 August, 2017, mutual funds had invested more than Rs. 1 lakh crore in credit opportunity funds (COF) through debt instruments. COFs are typically funds that exist to fund projects which the normal banking system finds too risky to invest. That is to say that banks have found them risky and the borrowers (NDFCs in this case) raise funds from other sources, including COFs. And mutual funds are buying the debt instruments from COFs.

Returns on debt are currently falling. Mutual funds are placing their debt fund money in more and more risky debt investments in the hope (or greed) of earning more money. In the process they are putting the investor’s money to great risk. SEBI is the latest to acknowledge this risk. But there is little that SEBI can do faced with the greed of the investment manager to beat the index or beat the market trend. The investment manager’s job and reputation is at stake. Investors’ money in debt funds will continue to run a high risk.

Buy Life Insurance and have peace of mind

Come out of mutual funds and invest in low risk products. 90% of India’s savings is in life insurance, banks, post office and provident fund. These are the places an individual saves money in. Ask your customers to buy life insurance for long term needs and keep their money safe.