How safe is Debt funds in these unprecedented times?

We all are witnessing that the Equity market is going through turbulence and uncertainty.

I would like to know how safe is Debt funds in these times with falling Banks interest rates, RBI rates cuts, Banks would be skeptical to lend in coming times, and lockdown adding fuel to fire.

Do Debt funds face a default risk and liquidity issue, more so today, and in upcoming days?

It might sound like a flippant answer but bottom line is good debt funds will be unaffected and bad ones, well, you know what as happened since IL&FS.

Absolutely! Like I said, this has been happening since IL&FS. There’s also been increased pressure in the bond markets post-Corona but these are extraordinary times. The best thing investors can do is to stop chasing returns in debt funds and stick to funds that don’t take credit calls, risks and chase returns.

PS: We recorded a really awesome conversation with Sivakumar, head of fixed income at Axis MF on some these points. Will be available on the Educate podcast next week.


@Bhuvan thank you for the response.

Considering the factors you have mentioned, I remember Quantum Liquid Funds AMC had earlier mentioned this:-

What are your views on overnight funds and Liquidbees?
Amongst the Debt funds, how can one diversity if one has to rebalance from Equity to Debt.

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Been wondering the same thing. Is it time to maybe shift from Liquid to Overnight Funds? Or just keep it in your bank/trading account for sometime?

They are safe because they just invest in overnight securities and hence no duration risk. But the returns will fall in line with the prevailing repo rates.

There are 100s of ways to slice this cake and there’s no one size fits all approach. It also depends on what kinds of an investors you are. To simplify things, for shorter goals you can stick to overnight, liquid and at the most UST funds. For longer duration goals you can probably look at quality Banking & PSU debt funds, Corporate bond funds.

Most other categories can be skipped in my view. Chasing returns and complicating the debt portfolio is a strict NO in my view. For most people short duration funds pretty much get the job done.

There’s no such thing as no-risk debt fund, everything carries risk. Even FDs,


You are right. Today, Franklin Debt funds are under lockdown including Franklin Ultra Short Bond Fund which was one of the best performing funds in that category.

Though Bank FD interest rates have fallen a lot, at least keeping funds in a bank account is insured for up to Rs 5 Lakh under DICGC Act including the principal and interest amount for your savings a/c, current a/c, FD all put together in a bank. I can only hope the banks are paying the insurance premium to DICGC so we are covered in case of a bank going bust.

But the banks, with reverse repo rate decreasing further, on one-way banks can’t park their excess money with RBI considering lower interest rates and thus are forced to lend. On the other hand, banks are more skeptical to lend in current times in fear of not getting repayments and thus increase in NPA. The problem is both ways.