How risky are your debt mutual funds?

Debt mutual fund investors are a worried lot. A host of negative news, the recent ones from Zee and IL&FS, have unnerved many debt mutual fund investors. Mutual fund advisors say some investors are in shock because they believed that debt mutual funds are absolutely safe and they offer better returns than fixed deposits.

“Investors have the notion that debt funds are 100 per cent safe. They are asking us how debt mutual funds can fall prey to the defaulting securities. They tell us thàt they invested in them because they are meant to be completely secured investment,” says Shweta Jain, founder CEO, Investography.

Recently, IL&FS was downgraded to D rating, from the highest credit rating of AAA, in a span of less than two months. The downgrade was because of its inability to make repayments. A likely default from Zee also scared many debt mutual fund investors.


Mutual fund advisors say investors should understand that debt mutual funds are not 100 per cent safe. Every unit of return above the risk-free rate comes with some unit of risk.

“If you are investing in debt securities, they will come with their set of risk factors. If you are going for a credit risk fund, the risk of downgrades will be there. Similarly, the risk component will be present in other categories as per the investment strategy," says Joydeep Sen, founder wiseinvestor.in.

Mutual fund advisors say IL&FS is the first default that has happened in the mutual fund space.

“DHFL has been downgraded by the credit rating agencies but they have not defaulted so far. Also, Zee group entities have not failed to service their coupon or maturity payments so far,” says Sen.

Sen explains that as per RBI’s latest Financial Stability Report, mutual funds (mostly debt) have a total exposure of Rs 6,500 crore in IL&FS. If you divide the total exposure by the total AUM of debt mutual funds, the total exposure in percentage terms comes to be around 0.4 per cent. Looking at the figure, we can say the total NPA in mutual funds is very small, he says.

Mutual fund advisors believe 2019 is going to be a volatile year for debt markets. They say investors should understand the risk involved in every mutual fund before investing. When you are investing in debt mutual funds, it is extremely important to choose a scheme that matches your investment horizon and risk profile. See table below for different debt categories and the risk involved in them.

Fund	Investment style/Average maturity	Risk involved
Overnight Fund	1 day	least risky
Liquid Fund	upto 91 days	very low
Ultra Short Duration Fund	macaulay duration between 3 months – 6 months	very low
Low Duration Fund	macaulay duration between 6 months – 12 months	low
Money Market Fund	upto 1 year	low
Short Duration Fund	macaulay duration between 1 year – 3 year	low
Medium Duration Fund	macaulay duration between 3 years – 4 years	medium
Medium to Long Duration	macaulay duration between 4 years – 7 years	high
Long Duration Fund	macaulay duration greater than 7 years	high
Dynamic Bond	Investment across duration	high
Corporate Bond Fund	Min 80 per cent in corporate bonds (only in highest rated)	high
Credit Risk Fund	Min 65 per cent in corporate bonds (below highest rated instruments)	very high
Banking & PSU Fund	Min 80 per cent in banks, PSUs, public financial institutions	medium
Gilt Fund	80 per cent in G Secs, across maturity	very high
Gilt with 10 year constant duration	Min 80 per cent in Gilts, macaulay duration of 10 years	very high
Floater Fund	Min 65 per cent in floating rate instruments	medium