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Can Debt Funds have a negative return?

Debt funds gave marginally negative returns (seen over a 7 day period) recently but this is likely to be a short term fluctuation. We are keeping a watch and the Scripbox basket should face lower volatility due to the distribution across three categories of funds.

What’s the news?

Certain Categories of Debt Funds saw a marginally negative return last week – What actually happened?


The Finance Minister presented a budget that was very well received by the markets. The government has made it clear that it will spend a large sum to revive the economy. This means that the extent of government borrowing will be higher in the coming year. 

It was announced by the Finance Minister in the Budget that gross borrowing for the current financial year was raised to Rs 12.8 lakh crore which is higher than the estimated amount. 

When the supply of papers increases, the returns demanded by investors go up and price of the security reduces. This causes a reduction in the NAVs of certain funds and thus impacts returns.

The rising yields on the benchmark government bonds since Jan 31st had percolated down to corporate bond yields as well.

Has this happened in the past?

This is a feature of Fixed Income Instruments. They are sensitive to changes in prevailing interest rates and they fluctuate from time to time. The extent of fluctuation depends on the category of the fund and the time period being considered. 

What are the funds that are affected?

The funds that invest in longer duration instruments are more prone to fluctuations. While the returns are higher in these categories they tend to be more volatile (as evidenced by the Standard Deviation of Daily Returns). 

RBI Response

To ease up the bond yield the Reserve Bank has decided to conduct a purchase of government securities under Open Market Operations (OMO) for an aggregate amount of ₹20,000 crores. With this intervention, the matter will be addressed adequately.

What does it mean for my investments?

While it can be hard to see even a small blip in returns when it comes to debt funds, we don't feel you should be affected by very short term fluctuations in prices. 

The return impact is largely insignificant and can only be seen over a 7 day period. This should smooth itself out over a longer time period. At Scripbox, we recommend that Short Term goals should be addressed by investing in a basket of funds that are spread across 3 categories which have lower volatility. We are keeping a close watch on the funds recommended and overall developments in the market.


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