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Are you worried about your debt Mutual Funds – this may help

Focus on the fact that, despite these problems, funds have been doing well

Over the past few months, we have seen quite a few high profile companies like IL&FS, DHFL, Zee and others, whose borrowings have come under a cloud. Some of these borrowings were from Mutual Funds and there is wide spread fear that your debt Mutual Fund investments can take a hit. In this context, we hope these facts and the resulting evidence helps.

Composition of debt mutual funds:

As on 20-Feb-2019, the total debt mutual fund industry was Rs 12.3 lakh crore (~ $ 173 billion). Of these, the shorter duration offerings like Liquids, Low Duration, Short duration, Ultra shorts account for nearly 2/3rd of the industry.

How about Credit Risk: 

For the entire debt fund market, most of the holding are in either government bonds, or AAA / AA bonds. Having said that, some of the problems we have seen have been in bonds of companies which were rated AAA or AA.

How about performance:

Despite all these problems which we read about in the newspapers, there has been no major dent in performance. Performance of various categories of debt mutual funds are provided below. 


Out of the 288 debt fund growth schemes, 8 funds (including 3 FMPs) were negative over the past 3 months. The total assets of these funds constitute about 0.5% of the entire industry.


Much of the problem is either due to credit risk or concentration risk. Other than this, the last few months have been a fairly good period for debt mutual funds, partly due to a fall in interest rates which benefit some longer duration bonds.


Lessons from this: 

There is no point in analysing a crisis and coming out of it without any lessons. So, here is what we feel are the lessons that make the most sense.

  1. Stick with debt funds in the shorter end of duration – like Liquids, Low Duration, Short duration, Ultra shorts.
  2. Do not compromise on the credit risk of the bonds being held by these funds. No point in taking risk for additional small returns. There are other places like equities where the risk payoff is much higher.
  3. Funds which are larger and have a longer track record are preferable.
  4. Try to hold safe funds for more than 3 years, and benefit from indexation benefit, rather than take on credit risk.

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