Red Flags And Triggers Investors Must Watch Out For

Mohit Gang: Honestly, the triggers for the debt (side) are quite different from what you observe in equities per se. That is a much more complicated category. The first and foremost part when I invest in a debt fund is not whether I’ll get 50 bps more or 50 bps less, but I think safety of my capital is the first principle when investing in debt.

So, the change in credit quality of a fund is one of the biggest triggers in a debt fund.

If I am investing in a complete AAA portfolio, I don’t want that to be diluted under any circumstances. So, there are fund houses, there are fund managers whom I know will always follow a full AAA portfolio basically, and that’s where I am comfortable.

Suddenly, if you see a rise in AA or A papers going beyond 10% of the overall portfolio, that’s the biggest trigger and the first alarm bells should ring.

Every month when the portfolios are out, one should have a portfolio check. If you see the exposure has increased in low quality credits, one has to press the red bell out there. That is the first point.

The second obviously is in a situation of a credit event, if you see papers being downgraded consistently in a portfolio. Let’s say you see Vodafone kind of events, where AGR dues are there and you find a ruling coming out in court, or you find a DHFL or an IL&FS kind of an event where papers are getting downgraded consistently in a particular portfolio. Then you might just want to cut your losses and exit the portfolio before any big credit event happens.

Even if a credit event has taken place and you know that the portfolio will get segregated now, and you know that whatever loss has been segregated out. It might not be a bad call actually to take an exit if you see the portfolio has produced one kind of a credit event. That has to be a calculated call on the overall portfolio. But yes, one can consider that.

The third point emanates out of the attributes of a portfolio, which is change in duration of the portfolio. Now, debt being interest rate sensitive, if I have invested in a short end of the curve–which is if I am investing in ultra-short term funds or low duration funds, or money market funds–I don’t want my duration to go beyond two years or one year. I have a mental threshold to that and I don’t want to take any interest rate risk in my portfolio.

But if I see a fund manager suddenly acting like a dynamic bond manager, let’s say in a medium term trying to go 10-year duration. Those kinds of triggers are very high alarm bells for me. At that point in time, one needs to take a quick call on the portfolio, in terms of what kind of risk one wants to assume.

The last point on the debt side is a sudden drop in AUM. An AUM rise or fall can still be accommodated in equity.

Debt is mostly institution money, which means a lot of institution people have pulled out and they must or could perhaps be privy to more information than what retail investors are.

If AUM suddenly drops to a large extent in a debt fund, that’s a very big trigger for us, and at that point in time, it’s good to quickly take an exit.