June 12, 2019

Sorry boss, we have stopped redemptions due to a liquidity crisis

..........So typically I will be needing this debt money desperately to buy equities when there is a crisis and equity markets have crashed (now whether I am able to pull it off in reality is a different issue).

The last thing I want is for my debt fund to say that “Sorry boss, we have stopped redemptions due to a liquidity crisis”. Credit funds given their inherent structure have a high probability of getting scr****d up in these scenarios.

So my simple laymanistic reasoning being – why take so much tension for debt returns. As it is equities give me enough of it, but at least the long term payoff is worth the pain

5. From an overall portfolio perspective, the incremental returns mostly go unnoticed

Also if you really think about it, most of us have credit funds as a small portion of overall portfolio. Say Debt is 50% and Equity is 50%. You may have 30% of debt portfolio as credit funds. Now this means it is 15% of overall portfolio.

So assuming you get 1.5% excess returns over short term funds, for the overall portfolio it works to 0.23% excess returns. The effort to reward for this category from an overall portfolio level is too less.

Instead you can focus on reducing the expense ratio of the overall portfolio, which is intellectually boring but easier and more effective.

So make sure you think about the credit fund contribution from an overall portfolio perspective before you make the decision.

So broadly my thesis remains and I will continue to avoid credit funds.

Still want to evaluate Credit funds?

Read more at https://eightytwentyinvestor.com/2019/06/12/debt-funds-revisiting-the-framework/

No comments:

Post a Comment