Middle East crisis: Top mutual fund categories to protect your investments

Mutual Funds (MFs) are typically held to be the go-to investment vehicle in times of crisis and the latest one in the Middle East is no exception to the rule. There are definite categories of MFs that investors can look into for their investments to tide over the crisis. However, investors may need to prioritize quality rather than chasing yields.

“In phases of volatility, investment-grade bonds make a good addition to portfolios because they bring fixed returns and regular payouts into the mix,” says Vineet Agrawal, co-founder of Jiraaf. In context, Indian MFs invest in bonds, especially debt MFs, by the purchase of GSEs, bonds, and other fixed income instruments. Such fixed income investments, especially in bonds helps to reduce dependence on market-linked swings and improve the overall balance of the portfolio.

Suitable examples would include G-Secs, SDLs (state development loans), and diversified portfolios of investment-grade corporate bonds with ratings ranging from AAA to BBB.

“For the debt portion in their portfolios, investors can explore high-quality debt mutual fund categories that invest in sovereign or high-rated instruments, maintain good liquidity, and have low credit risk, rather than chasing higher yields,” says Amitabh Lara, Executive Director, Anand Rathi Wealth Limited.

For short-term

For their short-term debt portion (i.e. less than 1 year), investors can consider categories that carry low duration risk and high liquidity, such as liquid funds, ultra-short duration funds, Money market funds, low-duration / short-duration funds. These funds invest in short-maturity, high-quality instruments and also suitable for parking money during volatile periods for staggering deployment into equities.

For medium- to long-term

For the medium- to long-term debt allocation, investors can consider categories that primarily invest in sovereign or highly rated securities, such as target maturity funds (investing in G-Secs / SDL / PSU bonds), Gilt funds, Banking & PSU debt funds, and Corporate bond funds with AAA exposure. “These categories generally provide better credit quality, lower default risk, and relatively higher stability during uncertain market conditions, which makes them suitable for the core defensive portion of the portfolio,” says Lara.

For investors in the higher tax bracket, arbitrage funds can also be considered as an alternative for part of the debt allocation. Although they are classified under equity taxation, arbitrage funds typically carry relatively low volatility and high liquidity, making them useful for short-term parking with better post-tax efficiency compared to traditional debt funds.

“The key is to focus on strong credit ratings and issuer quality rather than chasing just higher yields,” says Agrawal about the specific qualifications to loom at when picking your MF that you want to invest in during a crisis situation like the one ongoing.

Investors should stay conservative and look at categories such as short-duration funds, corporate bond funds with high-rated portfolios, banking and PSU debt funds, and gilt funds. These categories can add fixed returns and regular payouts while keeping credit risk lower.

“For investors accessing bonds through mutual funds, certain categories are better suited to the current warlike conditions,” says Tushar Sharma, Co-Founder, Bondbay.

Corporate bond funds that invest predominantly in AAA securities provide a good mix of safety and yield.

Short duration and money market funds help manage interest rate volatility while offering steady accrual.

Target maturity funds aligned to government or PSU bonds provide visibility of returns if held till maturity.

“Dynamic bond funds can also play a role, but in uncertain environments, strategies with clearer duration and credit positioning tend to be more predictable,” says Sharma.

Give FOFs the go-by

A Fund of Funds (FoFs) is an asset class that experts feel, may not be suitable as an investment option in the current crisis. A FoF typically invests in other Mutual Funds, rather than directly in equities, bonds etc.

When it comes to debt FoFs, investors are suggested to avoid as in most cases, FoFs carry an additional layer of expenses because the investor pays the expense ratio of both the FoF and the underlying fund. Since returns in debt investments are generally moderate, this double layer of cost can significantly impact real returns. “Therefore, for the debt portion of the portfolio, it is usually more efficient to invest directly in suitable debt mutual fund categories rather than through FoFs,” says Lara.

Use GSECs to tide over the crisis, but with caution

Government securities continue to be the closest proxy to a safe haven within the domestic market. During global stress events, they benefit from flight to safety and strong domestic institutional demand.

“However, unlike global sovereigns such as US Treasuries, Indian government bonds are also influenced by inflation and fiscal dynamics. If crude prices remain elevated, yields may not fall sharply. Despite this, they continue to offer capital protection and liquidity, making them a key defensive allocation,” says Sharma.