All investments carry an element of risk. Many of us are not comfortable investing in equity and equity related products due to its volatility and hence opt for investing in debt products, but with companies like IL&FS defaulting, are corporate debt instruments a safe option to invest in?
IL&FS and its subsidiary Bonds which enjoyed a high credit rating have been cut down to “D” the lowest grade. There were approximately 33 funds who had an accumulated amount of 2,900 crores approx invested in bonds of IL&FS and its subsidiaries. The NAV of some of these funds took a sharphit on account of the downgrade.
What should you do before selecting the right debt fund for yourself?
- You should check the credit rating of the fund and invest in at least AA+ category of fund. Keep an eye on the rerating of the securities and default of loan payments by the company.
- If you are investing in a debt product, change in interest rate plays a very crucial role. For instance if you have invested in a 5 year bond that gives 6.5% return and after 2 years if the return is increased to 8 %. You are stuck with a lower rate of interest. Hence keep a lookout for interest rate movements and invest accordingly.
- The market for bonds is not always active due to which there is always a risk of illiquidity and hence it is advisable to keep emergency cash.
- Debt instruments pay a fixed rate of return. At times inflation over powers these returns, especially if you lie in the high tax bracket, the net return you receive after paying the tax may end up being negative. Hence plan out your investment very carefully.
