I often see heated arguments in support of Income Funds, FMPs, Gilt Funds etc. Or simply discussing the merits demerits of different sorts of debt funds.

Here is a link to a table that computes returns over different time periods, across different types of mutual funds.

Mutual funds

This link is a dynamic one and hence should not be dated.

Unless there is a structural change in interest rate structures in India, it makes no sense for any investor to go beyond the simple Liquid Fund. The returns from Liquid funds is similar to those from all other fixed income products. Much lower stress, lower BP and lower volatility. And even if an income fund were to give a percentage extra, I would not mind forgoing it for the safety and convenience of the Liquid Fund. As a retail investor, if I keep ten lakh in a fixed income fund, the annual return difference would not be serious enough to warrant investing in to Income or Gilt funds.

Many folks want to ‘time’ the income or gilt funds, saying that there would be a big kicker when interest rates fall. We have been saying it for three years. Indian economy and inflation plus other unknown factors influence this.

So, why look beyond the Liquid Fund? Sleep well.

Yes, once in a way, the FMPs, are fine, so long as we know the indicative rates in advance. And a good fund house. And do not give me the bull about ‘indicative’ rates. Hold your advisor to the rate if there is a serious divergence, say beyond a percent or so. Every fund house will have planned the investments to a T in any FMP. Often, most of the investment comes from rollover of paper from a FMP that matures. If the FMP chain were broken, many companies would be in the dog house. So be aware of this risk in the FMP.

Treat Mutual Funds as an alternative to Co Fixed Deposits and Savings account. Liquid Funds are ideally positioned today to provide the option.




12 thoughts on “Which debt fund to invest?

  1. Dear Sir,

    You may agree, debt funds are easier to sell in comparison to equity oriented funds. Moreover, selling debt funds leads to sticky assets and steady revenue without too much of ongoing efforts

    Returns from debt funds do NOT make any meaningful difference to the investor. However the same cannot be said for the seller & the producer. And therefore this Debt Funds category is the single largest contributor to the industry AUM.

    It would be interesting to find out how many ‘Advisers’ really care about returns on invested capital. Most seem to be okay working for a pittance anyway.

    In such a situation who will insist on a just &fair return on client’s capital. Fiduciary responsibility gets limited to preserving capital &not its purchasing power.

    Liked by 1 person

      1. The idea is not to challenge anyone sir, but an attempt at rational thinking.

        1) Mutual Funds distribution / advisory is like struggling in quicksand. Margins have been consistently compressing and there’s always a threat of them getting reduced even further.

        2) Most difficult aspect of Mutual Funds advisory/distribution is acquiring fresh clients. It is a very long & tough process. And these clients acquired with great hardships can be easily lost to direct plans. . . Forget having a moat, you don’t even have a bolt.

        1) & 2) above make MF Advisory a profession with poor economics. Then would it be wrong to conclude, IFAs/Advisers really do not seem to care about returns on their invested capital.


  2. I have a doubt

    on valueresearchonline.com ‘s home page I see Fund Categories as Debt:Income, Debt: Short Term, Debt:Liquid, etc.

    when you say Liquid Funds, you mean Debt: Liquid?

    is “HDFC Short Term Opportunities Fund” (https://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=11308&utm_source=direct-click&utm_medium=funds&utm_term=HDFC+Short+Term+Opportunities&utm_content=HDFC+Short+Term+Opportunities&utm_campaign=vro-search)

    a liquid fund or debt fund?

    could you please clarify


    1. Thanks to balablogsdot.com, was thrilled to re-establish contact with a very old friend ( 1991-93) batchmate.

      Thank you sir!


  3. as a retail person, there is not limit to invest in liquid funds?

    say if I have invested 20 lakhs in liquid funds. what is the guarantee that the mutual fund house would not default on my investment? for example, anything above 1 lakh investment in bank fixed deposit, is not guaranteed by RBI


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