Summary: Retail investors are worried about their investments in debt funds after the closure of six debt schemes of Franklin Templeton. Risk, YTM, investment portfolio, and maturity are factors to consider while selecting a debt fund. Evaluate and monitor your debt fund schemes to ensure your investments are on the right track.

Six debt fund schemes of Franklin Templeton closed down. What does it mean? It means that investors cannot issue requests for redemptions. Franklin Templeton has assured that the fund will pay back every investor. This  incident has understandably led to nervousness among investors. They are thinking –

• Should I redeem my investments in debt funds while I can?
• Will other debt funds also close down and stall redemptions?
• Should I stop investing in debt funds?

Mutual funds are subject to market risk and cannot guarantee assured returns. But they have to play by rules laid down by AMFI and SEBI. At the same time, investors have to be careful while investing in debt funds. The funds that were closed were credit risk funds. A major part of the investment portfolio included securities that were rated AA or lower. This meant a higher risk of default but also chances of higher returns. As a retail investor, it is difficult to always be aware of the fund portfolio and changes in it. Investors with low capacity for such investment risks should stay away.

How does an investor evaluate a debt fund that is not a credit risk fund?
Let us look at the key factors to evaluate a non-credit risk fund. 
Low Risk – Seek out debt fund schemes with low credit risk and low interest rate risk. For example, liquid funds have to invest in securities that have a maturity period of 91 days or less. There is a lower chance of price volatility and therefore lower interest rate risk. Look for debt funds that invest predominantly in securities that are rated AAA. The credit risk or risk of default will be lower.
Yield To Maturity (YTM) – The YTM of a debt fund is  the weighted average yield of the underlying securities of a fund in proportion to the assets invested in those papers. The price of a debt security and its yield are inversely related. If the price falls, the risk is higher and therefore yield is higher. If the fund can manage the losses of default within the portfolio, the retail investor’s money is safe, else his investment will lose value. Evaluate the YTMs of debt funds with a similar investment profile. Regularly monitor the YTM and find the reasons for changes. Changes can be due to a change in credit quality or change in interest rates. 
Investment Portfolio  – Check the portfolio of the scheme. If a significant portion (Above 20%) of the portfolio consists of securities rated below AAA or has a large chunk in instruments of companies that may not be sound or are in a volatile sector. it might be best to avoid it. Too much of allocation (more than 5%) to a particular security is a risk. Review the portfolio of the scheme post your investment to check for changes in risks involved. 
Maturity/Duration – Check the duration of the fund and maturity period. If you need money in 6 months, but the fund matures after three years, the investment will not make much sense for you.

Should I redeem my debt funds?
We need not exit from our debt fund investments. Rather, we should revisit our investments and check with our financial advisor about the next steps. For example, if any of your debt fund schemes have invested in low rated companies, you may want to exit from it. If you have invested in too many schemes of one fund or similar themes, you should slowly but surely diversify across AMCs and sectors. 
It is not necessary to redeem all mutual fund schemes and invest in FDs. FD interest rates have gone down and there are risks in all investments. Maintain a high-quality and well-diversified investment portfolio. 

One of the reasons to invest in debt funds is to reduce volatility in the overall investment portfolio. Stick to funds that offer optimum returns at the lowest risks.