Time to state some facts (these are not opinions) -
The strategy that got the FT funds into trouble is the same strategy they have been running with for a long time. Buying papers of the lesser known entities of well known promoters is how they have been able to squeeze out high returns, logic being a well known corporate which is worth 10X won’t risk losing their reputation for X amount of debt one of their smaller entities has
Credit funds will invest in lower rates papers, that is the investment philosophy. This was known and declared in every single document the fund house had put out
There are others risks inherent in fixed income markets, for e.g. you have interest rate risk. When the RBI hiked MSF in Aug 2013 after the Fed taper tantrum, longer tenor funds that had 80% in G-Sec lost 7-8% in absolute terms in one single day. One can lose part of principal by getting the duration call wrong too, credit risk is just one of the risks in fixed income
Fixed income just means that the income is fixed, it does not mean that income is assured. This is Investing 101. Even bank FD’s are guaranteed only up to a particular threshold, beyond that amount if the banks shuts down there is no assurance of the depositor getting his money back. It is just that the central bank then steps in to keep confidence in banking system intact, they aren’t legally mandated to do it
In abnormal times, the usual concepts and correlations all break down. Those who understand macros well know that equity markets and credit spreads move in the opposite direction. When spreads move up, equity markets more often than not fall. If one does not understand the concept of credit spreads, got no business parking money in credit funds
When liquidity dries up, prices can fall drastically. In 2018 and 2019 we saw steep corrections in small cap equity counters when liquidity fell off, the same thing can happen in fixed income markets too. What is playing out in the FT episode is triggered by a drying up of liquidity, credit events have not happened yet