Are Debt Mutual Funds Safe Investments?

The winding down of six funds has definitely created a lot of anxiety among investors. They should now check their debt mutual funds in terms of quality and liquidity. If the fund is holding sufficient liquidity and the quality of papers it has invested in is of superior quality, it is better to remain invested

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The virus pandemic is taking its toll and Indian debt mutual funds are one of the victims. The first casualty is definitely the winding down of six debt funds by Franklin Templeton India. This unprecedented move has put many debt investors in a fix. They are now apprehensive that this may soon impact other funds and so the question is whether they should remain invested in debt funds. Is the closing down of this fund the beginning of the end of debt funds as a relatively safe investment? Our analysis shows that the impact will largely remain contained and is not likely to spread to other funds or fund houses. To fully grasp this we will have to go through the sequence of events that led to such a closure and why there is less chance of it being spreading.

Fast and Furious Growth

Debt funds were always considered as boring and lacklustre investments, especially by retail investors, who consider bank fixed deposit as a better option. Nonetheless, there was a paradigm shift post demonetisation. It changed the very nature of investments by individuals. They were compelled to deposit their savings in banks. This made the Indian banking system flush with cash, leading to a lower interest rate on fixed deposits. At the same time, the performance of physical assets such as gold and real estate were not as exciting. Mutual funds, therefore, became a natural gateway for investments.