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Should you exit debt mutual fund schemes with exposure to Vodafone-Idea papers?

Market fall
SR Srinivasan, a fee-only financial & investment planner, Founder of SriNivesh Advisors, based in Bengaluru.

Questions asked by his clients:
1. How will Vodafone-Idea issue impact our debt mutual fund schemes?
2. Should we exit our debt schemes?

His response to the investors:
Many debt mutual funds have exposure to the Vodafone-Idea papers. I believe it is all right unless your scheme has a high exposure. If your scheme has a more than 5% exposure to Vodafone-idea, you should consider moving out of the scheme. You should take into account your exit loads and taxation and then strategise your exit. Regardless of whether it is Vodafone or any other non-troubled corporate paper, if your scheme has more than 5% exposure, it is risky.

Now, your scheme has a 1-3% exposure, it really depends on how much risk you can take. For 1% exposure, if a default happens, your NAV will dip by 0.1%, which is not worth moving out of your scheme. If you are investing in a scheme with a good track record, I believe you can stay invested even with a 3% exposure. Many schemes have created side-pockets to deal with the issue.

Also, for now, there hasn’t been any default. Debt mutual fund schemes that hold these papers have not yet marked down any of these securities. However, a downgrade below investment grade (BBB) would force mutual funds to mark down these assets.

I am also telling my clients that they are not going to lose their money even if their scheme has a 3% exposure. The NAV dip will get balanced by the other securities if your scheme is diversified.

So, my advice is: if your scheme has a 5% plus exposure, you should move to a safer scheme. If it is less than 3%, stay put. If the exposure is between 3-5%, act in accordance to your risk appetite, exit load and taxation.
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