Are Debt Mutual Fund Investments Risky?
.png){kind=logo}
Propelled by AMFI’s impactful “Mutual Funds Sahi Hai” campaign, hordes of investors channelized their low-risk moneys from traditional instruments such as Bank Fixed Deposits, into Debt Mutual Fund Investments last year.
However, things have not quite turned out as well as they would have expected, as a confluence of local and global factors have kept debt mutual fund returns muted for nearly a year and a half now. Now (probably a tad too late), these investors are waking up to the fact that debt mutual fund investments are not exactly the risk-free propositions that they believed them to be. The short answer to the question “Are Debt Mutual Fund Investments Risky?” would be – no, they are essentially low risk. However, they aren’t risk-free, as many imagine them to be. Here are the four main types of risks that debt mutual fund investors must understand.
Interest Rate Risk
Interest Rate Risks are not understood clearly by most debt mutual fund investors, who do not realise that bonds, like stocks, can go up or down in price. When the RBI raises rates (or the consensus believe that it is going to raise rates), bond prices fall – and vice versa. This phenomenon is known as interest rate risk. In the past years and a half, we have witnessed many debt funds giving poor returns because of interest rate risk, which especially plagues those funds that invest into higher maturity bonds.
Credit Risk
Credit Risk is more easily understood by most Mutual Fund investors. Bonds, essentially being a loan that is extended from the bond purchaser to the issuer, carry the fundamental risk of the issuer not paying back due to their financial condition having deteriorated. If the Mutual Fund Investment that you have made carries a bond that defaults in this manner, your fund’s NAV will take a hit, leading to a dip in the value of your investment.
Reinvestment Risk
Reinvestment Risk refers to the risk of your fund manager having to reinvest your money into lower coupon (interest) bonds when the current set of bonds mature. Typically, this is a risk that is intrinsic to bond funds that follow a ‘buy and hold’ modus operandi, such as FMP’s (Fixed Maturity Plans). In such funds, if coupon rates fall by the time the current set of bonds mature, your money will earn lower returns in the next tranche.
Sovereign Risk
As the name suggests, this is the risk that the entire country’s economy goes belly-up and their government bonds start defaulting. We had such a default in India in 1972, and closely averted one in 1991 by depreciating the currency by a whopping 50%! Such a catastrophic event, although rare, can have a massive cascading effect on all bonds, and bring down your debt fund NAV’s in tow.
Your Investing Experts
Relevant Articles
Regular Savings Plan: A Balanced Approach to Stability and Growth
Not every investment in a portfolio is meant to maximise returns. Some are meant to preserve capital, manage volatility, and provide predictability. A regular savings plan serves exactly this role. It is designed for investors who want a more measured approach where stability takes priority, and growth plays a supporting role rather than the lead.
.png)
From Coffee to Crorepati: Small Lifestyle Tweaks Gen Z Can Make to Start Investing Early
Gen Z is often told to “stop buying coffee” if they want to invest. But that misses the point. Building wealth isn’t about sacrificing everything you enjoy. It’s about understanding how small, everyday decisions shape long-term habits. Starting early even with modest amounts can quietly make a meaningful difference over time.
Why Comparing Investment Returns Can Be Misleading
At some point, most investors have compared their investment returns with a friend, a colleague, or a number they saw online and wondered why their outcomes looked different. While this instinct is natural, return comparisons are often incomplete and, in many cases, misleading. Understanding why returns differ is far more important than comparing the numbers themselves.