For many people, the school of thought is to take risks, take risks in stocks and funds, don’t go into debt, because the reason you go into debt is not to take risks. But getting a guaranteed return set. Of course, there’s a school of thought that says if you’re going to take a modest risk and have a lot of debt, why not?
It is clear why Arun is not exposed to credit risk funds. Shalini, if you were to advise someone to stay in credit risk funds, are there some top quality funds that you would choose?
Shalini Dhawan: For someone who is looking at their risk exposure or has a modest risk profile, I guess we’re still talking about the debt position, in this case, what happens then, we’re talking about taking a measured amount of risk.
This is where the expense ratio of some funds comes into play because if you talk about a credit risk fund, it’s not going with the past one year’s return, but if I’m looking at the potential future yield and I just take it. A sample of a well-rated credit risk fund like HDFC Credit Risk or Kotak Credit Risk Fund today is in the range of 8.5-8.2%.
Now, if I understand the post-expenditure situation, because the product is an indicator of the return potential, and it is clear that the cost will eat up the product to some extent. Cost ratio of regular plan is very high. They are from 1.3%-1.5%.
This kind of credit risk feeds yield and so, the idea is that if I’m at 8.5% and 1.5% is going away in the expense ratio, and I’m left with 7% expected yield, then why should I take that? Kind of an accident? That’s not what I recommend.
I would probably ask them to go for a medium-term fund or a short-term fund, which might bring 7.5% or 8% yield to maturity. But it also has a low expense ratio at the same time…
Let’s say, if we are talking about medium term funds, and here some of the operations around regular plans and direct plans come into the picture for an investor, which we can explore later. But we’re talking about a medium-term fund, which has a yield of 8 percent or more, and if you’re talking about an expense ratio—the expense ratio of a live plan—and it’s somewhere in the range of 0.7% or so. , then you are talking about a very good product. So, you are taking the product into your portfolio without taking credit risk.
So, you’re taking a medium-term type of bond fund, but you’re not taking credit risk, which can be like volatility, which can be a lot of other things that go into a person’s portfolio with a medium risk profile.
A switch to a medium-term fund or a slightly lower-risk short-term fund, where the same logic suggests yields to maturity are in the 7.5% or higher range. But on direct plan, if you see, your expense ratio is as low as 0.2% or 0.3%. So that’s actually improving your product without taking any credit risk.