The IL&FS default in September 2018 and the subsequent defaults by others, have caused concern among fixed income investors.
Many of us were chasing yields blindly till Sep’18, oblivious to the associated credit and liquidity risks. Then IL&FS happened followed by others like DHFL, Essel, Reliance Home Finance, Sintex, etc and now we are chasing safety. Financial crises are unavoidable. Since 1991, we have seen a financial crisis every 5-6 years – 1990-91, 1997-98, 2008-09, 2013-14 and 2018-19 – barring 2002-03. Rather than wishing them away, let us understand how to protect our portfolios from them.
Long bull markets induce complacency. The consistent performance of credit funds since 2014 made investors believe that debt funds are devoid of risks. Events since Sep’18 have forced a rethink. Debt funds do carry market risk. When they invest in corporate bonds, they also carry credit risk i.e. risk of default or delay. Forced rollover of some fixed maturity plans and disproportionately large losses in some open-ended debt schemes, shows they also carry liquidity risk. How does one mitigate against these risks?
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Esta historia es de la edición July 2019 de Investors India.
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