The NAV of debt funds can fall due to these factors
Change in interest rates. Interest rates rise = bond prices fall.
market price of the bonds
Now, SEBI guidelines state that if a debt fund holds securities under 60 days, they need not be marked to market. That means the prices of the underlying securities needn’t be adjusted for the daily fluctuations in price. But they have to be if the maturity is more than 91 days.
Coming to your question, ultra short-term funds, and low duration funds hold securities with a maturity of more than 90 days and hence the prices have to be marked to market. So, when the prices of the bonds react negatively, they will be marked to market and hence the NAV of your funds will fall.
The biggest swings in price usually happen due to interest rate changes. So the general rule is, longer the maturity of the bonds, the higher the reaction to interest rate changes.
If the NAV falls how do I recover my investment?
You will have to hold the fund until the average maturity period of the securities it holds. This data can be found in the scheme factsheet.
If you have an expectation of a straight line return just because you are investing in short-term debt funds, then it is time to dispel that notion. Mutual funds are subject to market risks, and these are the market risks
You will have to consult your financial advisor. But the generally the fluctuations in liquid funds are by and far very few, but they do.
For example, this is the trailing return graph of Tata Money Market Fund. Nearly three months of returns were wiped out in a few days. This was because the fund was holding IL&FS paper