Investing in Debt Mutual Fund in current situation? Beware and understand Why (or Why Not)

Taking benefit of low Bank FD interest and low/negative return on equity mutual funds, many MF agents are marketing medium/long duration funds for low risk investments. However, they may not be a good investment for you on Risk Adjusted Basis.

1. Never Invest In Debt Funds Based On Past Returns

a. High Past returns: Certain debt funds in medium term or long term category have given higher return recently as the interest rates and yields have decreased (8-9% to 6%). Some funds even genrated double digit returns over last few years.

b. Past and Future returns inversely related: Generally, in long term or gilt (G-sec) debt funds, usually past and future returns are inverse and depend upon interest rate cycle. When interest rate goes down, return goes up and when interest rate goes up (over next 3 years), returns will come down. Even if interest rate stays the same (5-6%), the return would be 4-5% only assuming 1% expense ratio.

2. Moratorium:
Currently, about 25-30% of all loans of public or private banks as well as of NBFCs are under moratorium. As a result, review of creditworthiness or rating downgrade can only be done after the end of moratorium on August 31, 2020, i.e. in September/ October.

How many of these companies would become NPA or be downgraded is to be seen. But when that happens, the price of debt securities would go down and so is the return.

How to invest in Debt Mutual Fund in Current Situation:

  • Keep money in cash or bank FD until October 15 ( 1.5 months after moratorium) and decide accordingly.
  • DO NOT invest in debt funds with duration of 3+ years with long term focus
  • You may only be able to generate low single digit or even negative return if debt mutual funds were not selected wisely
  • If you are an NRI,
    • If funds in NRE account, have 1 year NRE FD or money in savings account
    • If funds in NRO account, have FD for 3 months
    • Decide about investing in debt mutual fund after 3 months
  • Contact your advisor (not an agent) and invest as per his/her advice

Always Remember Every investment is a good investment. The question is whether it is a good investment for YOU.”

About Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) Mr. Jigar specializes on NRI Investments and Taxation. He is proud to be one of only 21 CFA Charterholders in India working as consultants. (In 2011, when he became CFA Charterholder, out of 97,173 CFA Charterholders in the World, only 697 Charterholders were in India and only 3% work as consultant; Source: He received his MBA (Finance) from University of Illinois, Chicago, USA, CPA from USA and a Chartered Accountant from India. Jigar has over 15 years of professional experience including more than 4 years with KPMG USA’s Risk Advisory Services. Currently, he provides Wealth Management and taxation consulting serving clients from USA, UK, Americas, Europe, Middle East, Asia, Africa, Australia and India.


  1. Sir ,
    Is it advisable to invest in bonds (debt fund). For 2 years?

    • I would not recommend debt funds for 2 years as the yield has already gone down and also the 2 years would he considered as short term for calculation of capital gain taxed at slab rates. Instead, I would recommend bank FD. Thanks.

  2. 1. Looking at the recent crisis of some debt MF schemes of Franklin Templeton AMC, the problem was complete absence of liquidity for bonds in which the MFs had invested. What are your views about liquidity of debt securities/funds?
    2. There are some news in business dailies about moratorium period being extended till December, 2020? How do you think the investment scenario to be impacted for those investors generally looking for fixed and less risky returns?

    • 1. RBI has made sure enough liquidity in the market and currently, not an issue. I would think RBI will continue to pump in liquidity.
      2. I don’t think the moratorium would be extended further. If it did, it would affect business sentiment negatively. Thanks.

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