Debt Funds are not as innocuous & simple as they sound. The word ‘DEBT’ Means Money Borrowed and Lender get a fixed Interest from it, however, these are still subject to 3 Types of Volatility Parameters/ Risks and investors should not expect a straight-line return from these.
1. Interest Rates Risk.
2. Credit Risk.
A. Bonds Prices tend to move in the opposite direction of Interest rates. Spike in the interest rates means a cut in bond prices.
B. Higher the Duration (Maturity) Period of the Bond, the larger will be the Cut. In general, for every 1% increase or decrease in interest rates, a bond’s price will change approximately 1% in the opposite direction for every year of duration.
Credit Risk simply applies to the creditworthiness of the institution whose Bonds/ Security MF has purchased. Higher the credit rating of the issuer of the bond Higher will be the safety. AAA/A1+/AA/A can be considered to be safe, with AAA/A1+ being the safest. Attached is the rating Nomenclature for reference.
Liquidity Means being able to exit the investment when needed. When crisis strikes not having good paper quality can result in a Liquidity crunch. FMP’s are generally locked in for a specific duration and can’t be redeemed.
SNMA Capital Managers.