MYTH-1. Gilt funds come with zero risk
·
Since
gilt funds are issued by the government, people wrongly believe that one can’t
lose money in gilt funds.
·
There
is no credit risk in gilt funds as the government will always return the
money equivalent to the face value of gilts.
·
However, gilts are traded in the market, and their values go up and down on a daily
basis.
·
An investor can, therefore, see fluctuations in the NAV of the invested gilt fund.
·
Consequently, some of the investors may see value erosion in their gilt investments
too.
MYTH-2. NAVs of liquid funds cannot
fall below face value
·
Although
the history of liquid funds shows that NAVs have rarely gone below the par
value (giving negative returns), there are instances of
the same.
·
Facing
heavy redemption and – in some cases – write-offs of part of their investments,
some liquid funds have given negative returns.
·
In
such unusual circumstances, either the fund house, the government or the
banking regulator steps in to rescue such funds to instill confidence in the
market.
·
However, the negative returns are in single-digit percentage
points only.
MYTH-3. Dynamic bond funds are
all-season debt schemes
·
Since
these funds play on the price appreciation or fall of the same, they are
suitable for investment only when there is a probability of a quick change in
the interest rate scenario, either on the upside or on the downside.
·
When
the interest rate scenario is stable, these funds would perform in line with
other duration funds.
·
Dynamic bond funds also play on the probable changes in ratings of debt instruments.
·
Investors can, therefore, also look at these funds when, due to a change in the economic
cycle, there is a possibility of ratings upgrade of some companies, and hence
debt instruments issued by such companies.
MYTH-4. Maturity & duration of a
bond fund are same
·
The
two are very different from each other, although loosely used as same in the market.
·
A
bond fund’s maturity is the total length of the time when the principal is paid
back.
·
So, for a government security of 10 years, the holder of the paper will earn
interest for 10 years after it is
purchased, and will get back the principal amount thereafter, with no further accrual.
·
Maturity
is, therefore, a definite number which remains constant for a bond (in terms of when it
would mature), while duration is a concept.
·
Although
expressed in number of years, duration may vary between fund managers for the
same bond.
·
It
is usually used to measure the interest rate sensitivity of a bond due to the
up and down movements of yields and bond prices.