#AskBQ: What Debt Fund Investors Need To Know After Franklin Templeton Winds Down Schemes

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Then there is the fund manager risk. Actively managed debt funds are managed by fund managers who are specialists, who may have strategies that may positively or negatively impact the returns that the fund brings in.

And finally, there is a credit risk, which is the problem we are having with Franklin Templeton. If the papers that a fund is investing in are lower-rated, then they will yield a higher return, but they also carry a higher level of risk. There is the higher possibility of a default. In a situation where there is risk aversion, such debt doesn’t find many takers.

Rao: There is also the economic risk that affects everything, but is also dramatically affecting mutual fund investments. In a situation where there is an economic shock, there will be large redemption pressure. In this case, we don’t know how long the crisis will last and how many defaults we can expect over the next few months. This risk of defaults is faced by banks as lenders to such companies, and by mutual funds as investors in their debt.

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