Don't Shy Away From The Debt Funds, Understand The Risk

There is a saying that ‘Challenging times teach us important lessons!’.

- D P Singh

All the unexpected events faced in the past by humankind – be it the scale of a global pandemic or environmental issues or even one-off market events– have taught us a lesson and paved the way for evolution helping us emerge stronger and wiser. It is important to stay calm through these events and learn from the experience.

We are currently going through unprecedented times with the outbreak of COVID-19 pandemic. Every citizen across the globe is exposed to its negative implications and so are the businesses. With lack of clarity on the extent of impact this outbreak will have on the global and domestic economy, market functioning has also been disrupted. While dealing with the pandemic crisis, the mutual fund industry was faced with another challenge recently with the closure of six of debt schemes, which resulted in widespread panic among the investor community.

Often investors tend to compare debt mutual funds with other traditional investment avenues. The need of the hour is better understanding of the functioning of these products and how they differ from other traditional investment avenues. Let us understand this from the current market perspective. The reason of closure of six of the debt schemes in the industry was lack of liquidity (the capacity to convert the assets to cash easily) at scheme level to meet investor redemptions. Investors need to understand that liquidity in case of mutual fund is different as compared to say bank deposits.