Are the debt funds safer than equity funds?

Sujay
Jun 9, 2019
Recently, after DHFL defaulted on its bond repayments, some debt funds have lost as much as 50% in a single day. I thought such a scenario was only possible with equity funds. Are debt funds really safer than equity funds?
1 Answer
Jun 11, 2019

Debt and Equity are two different products.

Equity is part ownership of the company. There is no return which is guaranteed in equity. The returns are contingent on the growth of the business.

Debt is lending money to a company. Debt investments tend to be less risky than equity investments but usually offer a lower but more consistent return.

Equity and debt both have different functions and cannot be compared to each other but both are necessary in a portfolio:-

Debt investments are used to protect the wealth an investor already has.
Equity investments are used to grow the capital.

On the case of DHFL it was a special case of a company missing interest payments to debt holders. Many debt mutual funds have invested in lower quality company just to generate higher returns.

A debt MF scheme falling 50% is a special case and should not be generalised. It was just a case of MF lending a large amount of loans to a company which has missed interest payments.

Remember the goal on a debt fund is not to get higher return but to protect the capital.

Also debt funds do have credit risk which is never told to the investors. Credit risk is the risk of the borrowers defaulting on their repayment obligations.

While looking for a debt fund investors should only look at liquid funds.

To summarise Debt MF and Equity MF cannot be compared to each other. Debt MF has a credit risk and therefore investors should stick to liquid funds.

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