Financial Risk Management is Key
Financial Risk Management:
Credit risk is still unattractive since uniform recognition of risk across segments is underway. The aftermath of the NBFC crisis demands better financial risk management. For fixed-income investors, high quality, low-medium duration mutual funds make ample sense.
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NBFC Crisis & Mutual Funds
Credit risk hides in plain sight, the NBFC crisis evidence that ratings are fallible. ILFS’s default triggered the NBFC crisis resulting in a liquidity crunch and a higher cost of borrowing. When banks refused to lend, mutual funds stepped up. Some mutual funds made phenomenal returns during the NBFC crisis by accepting higher upfront payments and lower interest throughout. This immediately boosted returns but fell short on financial risk management.
Financial risk management avoids latent risks. Investors chase higher yields to overcome the risk of low returns. Compromising on quality for returns is not financial risk management. Investing at fair risk-reward levels is a more effective strategy.