Looking for safe debt funds? Here\'s the list

Flight to safety – the phrase aptly describes the mood among debt mutual fund investors lately. Faced with a series of setbacks to debt mutual funds in the last two years – starting with IL&FS fiasco, followed by a host of downgrades and defaults, and more recently the shocking decision of Franklin Templeton Mutual Fund to shut six debt schemes – these conservative investors have either sold their debt mutual fund investments or are perpetually worried about the safety of their debt mutual funds.

Most mutual fund advisors have been asking their hassled clients to stick to overnight funds, liquid funds, corporate bond funds, and banking & PSU funds. If the investors are extremely cautious, these advisors have been asking them to stick to overnight funds and liquid funds.

ETMutualFunds.com has put together a list of 35 debt mutual funds, spanning across different categories, to help investors looking around for safe funds. How are these funds safe? They have very high credit quality. According to Morningstar, these schemes have been investing around 98% of their portfolio in the highest-rated or AAA-rated instruments for the last two years. Simply put, they have investments only highest-rated securities.

Does that solve your problem?

According to mutual fund advisors, most mutual funds have turned cautious and started investing very carefully after the Franklin fiasco. On April 23, Franklin Templeton Mutual Fund announced its decision to shut six debt mutual fund schemes, citing adverse conditions in the bond market due to the Covid-19 pandemic.

The decision has unnerved debt mutual fund investors, most of whom have a conservative risk profile. It also put many investors, who have parked the money for a short duration, in a fix.

Debt mutual fund space has been facing rough weather since 2018, when IL&FS papers were downgraded. It was followed by a series of downgrades and likely or real defaults involving a host of firms like DHFL, Essel Group, Yes Bank and Vodafone, among others.

"We have been asking investors to stick to schemes which are AAA-heavy in their portfolios. There are some really big safety levels with such schemes. In a falling rate scenario, the schemes with AAA rated bonds will go up more than the AA or A rated ones. Secondly, in a situation like today, AAA is a highly liquid security. These companies are big and can manage redemption well," says Chokkalingam Palaniappan, founder, Prakala Wealth Management, based in Chennai.

He says this is exactly what went against Franklin Templeton Mutual Fund. Faced with redemption pressure and bad market conditions, the Franklin schemes didn't have many AAA rated securities that could be sold in the market. Indian bond markets lack depth and it is a task to find takers for low-rated papers even in a good market.
“In the long-term, even AA rated companies would give good returns, but the idea of a debt mutual fund is that you can redeem anytime. If that is what you prioritise, go for schemes that are AAA-heavy," says Chokkalingam Palaniappan, founder, Prakala Wealth Management, based in Chennai.

Schemes with most investments in highest-rated instruments

Scheme name	Inception date	Category
Axis Banking & PSU Debt Gr	08-06-2012	Banking & PSU
DSP Bank & PSU Debt Reg Gr	14-09-2013	Banking & PSU
Invesco India Bank & PSU Debt Gr	29-12-2012	Banking & PSU
Sundaram Banking & PSU Debt Gr	30-12-2004	Banking & PSU
IDFC Corporate Bond Reg Gr	12-01-2016	Corporate Bond
Invesco India Corporate Bond B Gr	02-08-2007	Corporate Bond
Sundaram Corp Bond Gr	30-12-2004	Corporate Bond
HSBC Flexi Debt Gr	05-10-2007	Dynamic Bond
IDFC Dynamic Bond Reg Gr	03-12-2008	Dynamic Bond
Mirae Asset Dynamic Bond Reg Gr	24-03-2017	Dynamic Bond
Nippon India Dynamic Bond Gr	15-11-2004	Dynamic Bond
Quantum Dynamic Bond Reg Gr	19-05-2015	Dynamic Bond
SBI Dynamic Bond Reg Gr	09-02-2004	Dynamic Bond
IDFC Bond M/T Reg Gr	08-07-2003	Medium Duration
HSBC Debt Growth	10-12-2002	Medium to Long Duration
IDFC Bond Inc Gr	16-07-2010	Medium to Long Duration
Nippon India Income Gr	01-01-1998	Medium to Long Duration
Aditya BSL Money Mgr Reg Gr	13-10-2005	Money Market
Franklin India Savings Gr	11-02-2002	Money Market
HDFC Money Market Gr	18-11-1999	Money Market
ICICI Pru Money Market Reg Gr	09-03-2006	Money Market
Invesco India Money Market Gr	28-08-2009	Money Market
Kotak Money Market Reg Gr	14-07-2003	Money Market
Nippon India Money Market Gr	16-06-2005	Money Market
Tata Money Market Reg Gr	22-05-2003	Money Market
UTI Money Market Reg Gr	13-07-2009	Money Market
IDFC Bond S/T Reg Gr	14-12-2000	Short Duration
Canara Robeco Ultra S/T Reg Gr	14-07-2008	Ultra Short Duration
Essel Ultra Short Term Reg Gr	19-02-2010	Ultra Short Duration
L&T Ultra Short Term Reg Cum	19-01-1998	Ultra Short Duration
ICICI Pru Corporate Bond Gr	11-08-2009	Corporate Bond
Kotak Bond S/T Reg Gr	02-05-2002	Short Duration
L&T Money Market Gr	10-08-2005	Money Market
SBI Savings Reg Gr	19-07-2004	Money Market

Source: Morningstar

A word of caution, there is no guarantee that a security would remain AAA forever. A company can get hit in adverse market conditions and the ratings of its debt instruments can be downgraded. However, you cannot do anything about it now. All you can do now is to stick to safe schemes or schemes with most investments in highest-rated instruments.

Please note, we have excluded liquid funds, overnight funds and government bond funds categories from the list as they generally have a good quality portfolio, We have considered the average credit quality of AAA above 98% for 2 years. Only those schemes which have been around for more than 2 years have made it to the list.