Time to look very closely at what your debt funds are hiding. It makes no bloody sense to chase yield just to get some 0.5-1% extra return. If that's the criteria you are using to pick a debt fund then you are in deep trouble.
Your equity will do the job (with some luck) of creating wealth for you. You don't have to take short sighted greed driven gambles just for extra 50bps. Funds where the managers are chasing yield will inevitably land in trouble. It's a dead certainty.
You don't need risky products like credit risk funds either. These funds should NEVER be part of your core debt allocation. This is akin to putting 100% of your retirement money in a small cap fund - it's stupidity. Credit risk doesn't pay!
Or rather it doesn't pay enough for the risk you take. Pick funds where the manager follows what he says. Don't go choosing random funds just because it's part of some stupid list. Look at the past portfolios too, to figure out of the manager/AMC has been seduced
by that extra yield. Avoid all the fancy categories. For most parts, in my view, Liquid, ultra short, corporate bonds, banking & PSU, Money Market funds and in GILT (ONLY IF YOU KNOW WHAT YOU'RE GETTING INTO) will more than suffice as your core debt allocation.
If you are still smitten by extra returns and are greedy, you can try gambling with some dynamic bond funds or try timing interest rates with gilt funds (you'll most certainly fail). Also, I've recently learnt diversification is not just a number.
If a fund has too many similar exposures that defeats the purpose, its should be reasonably diversified across quality issuers form multiple sectors. Having 10 different bonds of oil companies is not diversification for example.
As the FT issue has highlighted, liquidity of the portfolio has been an parameter we all rarely considered. And it's high time we take it seriously. Ensuring a fund holds high quality known names makes sense. But figuring out of a debt portfolio is liquid is easier
said than done. Of course simple things like 100% AAA, manager's track record help, but they are by no means foolproof. To be fully honest, I don't yet know how to assess a fund's liquidity but this is one things I'll spend time figuring out.
Also, pick your AMCs carefully and stay away from cults, they don't end well. What's in a name? Jackshit! Spend time on learning the basics of debt, it'll pay handsomely. Don't place blind faith in any AMC or manager. You are, at the end of the day, just a folio number!
Some more thoughts
indexheads.substack.com/p/till-debt-do…
indexheads.substack.com/p/till-debt-do…
Pay close attention to what the AMC and the managers day and do. Check those monthly portfolios closely and if you smell something, question them! Or find out! Pays to be safe than sorry.
If you choose a shitty equity funds, you'll probably won't lose as much compared to a shitty debt fund. Defaults are permanent!
