Are Your Debt Funds in Trouble? Is There an Alternative?

13 May 2022
9 min read
Are Your Debt Funds in Trouble? Is There an Alternative?

Debt funds are a type of mutual fund that invests in debt securities. A debt fund invests in bonds and other types of fixed-income securities (like mortgages) as opposed to stocks. These funds can be held by individuals or institutions, and they have all sorts of names: bond funds, high-yield bond funds, junk bond funds and the list goes on. They can be used by investors who want to diversify their portfolios with non-stock holdings, but they also tend to pay higher returns than other types of investments such as stocks or mutual funds.

Basically, debt funds invest in fixed interest, generating securities like government securities, treasury bills, and commercial papers. corporate bonds and other money market instruments.

Due to current market conditions and uncertainties, there has been an increasing threat among investors regarding their mutual fund investments. Mostly the debt mutual fund investors. Let us understand why.

Investing in debt funds is a great option for investors who want to diversify their portfolios and have access to a wide range of fixed income securities as they come with a lot of benefits and different types.

Here are a few things you should know before investing in debt funds:

  • Debt funds invest in both short-term and long-term debt instruments.
  • Debt funds invest in both corporate and government debt securities.
  • Debt funds offer higher yields than bank deposits, but lower yields than equity mutual funds.
  • You can invest through systematic investment plans (SIPs) or lump sum investments.
  • The NAV of the fund changes with interest rates and market conditions, so you need to regularly monitor its performance to see how it’s doing.
  • A debt fund can be redeemed at any time by selling units or units with a call option attached to them on the exchange where they trade, or by transferring units into a SIP or another scheme depending on whether there is an exit load associated with the purchase of these units at that time.

Things to consider before investing in debt funds

Before you invest in debt funds, consider the following:

  1. Are you comfortable with the risk level of investing in debt funds? 

Debt funds have higher risks than other types of investments because they invest in high-risk corporate bonds and other debt instruments.

  1. What is your investment goal? 

Debt funds can be considered a short-term investment option if your investment goal is to make a lump sum payment in a few years. It can also be considered as an investment option with medium-term goals (5 years or more) if you want to earn steady returns over a long period of time.

  1. Do you have an emergency fund? 

If not, it’s best to keep your money safe in cash instead of investing it in debt funds to avoid losing money when there is a market downturn or an economic crisis occurs.

  1. Are you okay with the volatility that comes along with the risks?

You need to make sure that you’re comfortable with the risk level of the fund and its volatility. A debt fund will have more volatility than a bond fund, but it also has higher potential returns. You should know what kind of risk level you’re comfortable with before investing in a debt fund so that you don’t get overwhelmed by fluctuating prices and potentially lose money on your investment.

  1. How much time do you want to hold onto your investments?

You may be able to make more money by holding onto assets for longer periods of time, but if you don’t have the patience for this or if there’s another reason why holding onto an asset for longer than necessary isn’t ideal for you (perhaps due to tax implications), then it might make sense not to invest in long-term funds at all.

Are Your Debt Mutual Fund Investments in Trouble?

People consider Debt mutual funds a bad investment choice because they don’t earn enough interest to keep up with inflation. If you’ve noticed a drop in the performance of your debt mutual funds, you’re not alone. It seems like hundreds of investors are asking the same question. But what’s really happening, and what should you do about it?

The most common cause of a decline in performance is that interest rates have risen. When this happens, the value of your bonds goes down. This can affect all types of investments, including stocks and mutual funds.

The truth is that most investors don’t understand how debt funds work or what they really are. When they think of a “debt fund,” they imagine that they’re buying stocks or bonds—but that’s not what they’re doing at all. They’re actually buying loans. And when those loans go bad, everyone who owns them loses money. So when people are looking at their investments and noticing that their returns aren’t as good as they were before, it’s not because there’s anything wrong with the debt funds themselves—it’s because there’s something wrong with the economy as a whole.

Moreover, investors should understand that even in the worst scenario, if a default happens, then the returns will not turn negative. The simple reason is that the exposure is not high.

If you are still in panic mode, then you should consider re-checking your risk profile.

Moreover, this is something you should check before investing in debt funds. You should carefully understand the risk involved in the schemes at the time of investing. There will be up and down movements in the credit risk funds.

Similarly, there will also be upgrades and downgrades in the bond funds, as these are too market-linked. You should be prepared to sail through the risk while choosing to invest in the same.

Now, what are the alternatives available to shift from your current debt funds?

When the liquid mutual fund schemes got hit by the IL&FS crisis, then many mutual fund advisors told the investors to shift to overnight funds if they didn’t want to take any risk.

How can you tell if this is what’s happening with your portfolio?

If interest rates have risen, there will be some signs in your portfolio’s returns:

1) Declining returns over time

If your returns have been dropping steadily over time, it could be due to rising interest rates. You’ll find that your bonds have lost value because they’re no longer as attractive to investors. This means that they won’t help you grow as much as they used to—and that can be devastating for your investment strategy!

2) Falling bond prices

If you’ve noticed that bond prices are falling across the board, this could mean that interest rates are rising and bonds are losing their appeal to investors. 

3) Recession 

Your economy is in recession, which means that many people are spending less money on consumer goods (like cars and houses), which makes it harder for businesses to make money selling products and services (because there aren’t enough customers). This can cause businesses to go bankrupt and eventually can leave your debt funds suffering.

4) Poor strategies by your debt fund manager

Your debt fund managers are doing a poor job managing their portfolios. They’re making investments in companies that aren’t doing well and they’re holding onto them too long while waiting for them to bounce back. This can be hard to detect because it’s not always obvious which companies are doing poorly, especially if you don’t have a lot of experience looking at quarterly reports or understanding all the financial jargon. But if you’ve been following the news about companies in your industry and seeing some of them struggling financially, or seeing others do well and thinking about switching out some of your holdings for those companies instead—that might be a good sign that something isn’t right with your debt fund managers’ strategies.

What Can the Investors Do?/ Is there an Alternative?

It’s important to remember that debt funds are investments, not savings accounts. They are designed to fluctuate in value, and can even lose money over time. But there are steps you can take to protect yourself from further losses.

First, if you have any concerns about the health of your fund, contact the fund manager or company that manages it as soon as possible. It’s important that you understand exactly what is happening with your investment so that you can make informed decisions about how best to proceed.

Second, if you want to withdraw your funds before maturity (the date when they will be paid back), make sure that you understand all of the associated costs—and also be aware that some funds may charge fees if they are redeemed early.

You should also consider selling off some of your shares in debt funds if they become too expensive relative to other options available on the market today. This can help you to protect yourself from further losses while still allowing you some opportunity for growth later down the road when things improve again.

Third (and finally), consider diversifying your portfolio by adding other types of investments into your portfolio alongside debt funds—such as stocks or mutual funds—to help mitigate risk and reduce volatility overall.

If you’re looking for an investment that offers more growth potential than a debt fund, or if you want something that’s riskier than a debt fund but still has some level of security (to help protect your assets), then there are several other options available to you.

For example, one option might be investing in real estate. Real estate can be extremely lucrative and provide excellent returns on investment (ROI). However, real estate can be very volatile as well—and it’s important to understand how much risk you’re willing to take before deciding whether or not this particular investment path is right for you.

However, don’t jump to change your investment, without actually knowing how much your returns are affected by the current market conditions. Before compromising on your returns by shifting to the safest option you should understand the risk of your investment properly.

You can consider changing your investment strategy if you are investing for a medium or short duration of time. But, if you are investing for a long period of time, then you can wait, as the market will change sooner or later.


Debt is a risky asset class, there will always be some element of risk involved. If you take on a longer-term risk, you’re entitled to a higher rate of return in compensation. If not for anything else–the ability to shift your investments over to a different type of debt fund without penalty–is reason enough for investors not to rule out this investment category entirely. 

You should understand your risk taking capacity well before investing in them. Also, research the best debt mutual funds and choose the one that fits your financial goals comfortably. 


The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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