Giant corporations and other businesses uses the funds with the most AUM for their treasury management.
Since the fund is used by corporate houses, AMCs have no incentive to mis-manage a fund.
Bigger funds are also more diversified. For example, HDFC Liquid Fund, which is the biggest liquid fund has 212 securities in it and ICICI Liquid which is 2nd biggest fund has 246 securities in it. Each security has a smaller weight in the overall portfolio and even if 2-3 bonds default at the same time, which is improbable, the hit on the NAV is very very small.
And this perfectly sums up what not to do when choosing a debt fund, or any other fund for that matter. Looking purely at the returns of the fund is harmful. In fact, most of the funds that were hit in the IL&FS default were category topping funds.
Look at the portfolio, the process the fund house follows, the pedigree of the fund manager/team, volatility in return of the fund and then take a decision.