The recent issues concerning debt funds arising out of credit issues have stunned the common investor who never thought he could lose money in a “safe" product such as a fixed maturity plan (FMP). Moreover, while a mutual fund does not guarantee a return in an FMP, every investor is aware of the approximate return that he can expect, a kind of a guarantee but not backed by any capital. An FMP product actually exists only due to its tax arbitrage over bank deposits. The FMP industry normally picks up when the interest rates are on an uptrend and the debt funds start showing lower returns. It’s time investors realise that a mutual fund is a pass-through product unlike a bank deposit where there is a guarantee on the back of capital.
A debt fund takes credit risk and if there is a default in the credit, it translates into a fall in the net asset value (NAV). But there have been very few cases when this has happened.
