Is there a zero-risk debt mutual fund scheme?

Ultra conservative investors are asking whether there are any mutual fund schemes that are totally risk free.

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Debt mutual fund investors are a worried lot after the recent spate of downgrades and defaults that have hit the debt mutual fund space. Many of these self-confessed ultra conservative investors are asking their mutual fund advisors whether there are any mutual fund schemes that are totally risk free. They reason that since they are investing in debt mutual funds not for extraordinary returns, but convenience and tax advantage, they would rather settle for schemes that are risk free.

“We can suggest less risky mutual fund schemes, but a risk-free mutual fund scheme doesn’t exist,” says Babu Krishnamurthy, Chief Serpa, Finsherpa Investment Services, Chennai-based wealth management firm. The point is: every debt mutual fund scheme has some element of risk. Be liquid schemes or ultra short duration scheme, two of the relatively less risky debt schemes, there is always an element of risk. If the fund manager takes extra risk or takes wrong calls, they just add to it. That means you shouldn't waste your time looking for debt schemes with no risk at all.

How about debt schemes with least amount of risk?

The idea of a low-risk or risk-free investment depends entirely on one's understanding of risk, say mutual fund advisors. For many investors, losing their principal amount is risk, whereas for some others any depreciation in their gains is risk. Advisors believe a low-risk scheme for one set of investors might be high risk for another set.

“Even though there are no straight answers to a risk-free investment, we can suggest safer options. Liquid funds and AAA-rated banking and PSU debt funds are least prone to risk when it comes to mutual fund investments. In these schemes your chances of losing your principal amount is very less,” says Babu Krishnamurthy. "The banking and PSU debt funds have only AAA-rated securities in their portfolio and hence the chances of downgrades hitting these schemes are relatively lower."

Mutual fund advisors also add that contrary to the popular perception FMPs or fixed maturity plans are/were never a safe investment for very conservative investors. These debt schemes with a fixed tenure were often taken to be fixed deposits from mutual funds by many investors. They were oblivious or ignored the risks associated with these schemes until the IL&FS default, when some mutual fund houses rolled over their FMPs and some others only allowed partial withdrawals.

“Liquidity is a must when you are a conservative investor. If you don’t have control over your money at a given point and your risk appetite is low, it can be disastrous,” says Pankaj Gera, a certified financial planner based in Delhi. Several mutual fund advisors have started asking their clients to avoid schemes with close-ended feature after the recent crisis in the mutual fund universe.

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For more, read: Avoid all mutual funds with lock-in feature, say advisors

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