After the Franklin event, I have reduced my debt exposure to zero. How should I fix this?

After the Franklin fiasco, I am losing confidence in debt mutual funds. I have lost a large sum of money invested in Franklin Ultra Short Term Bond Fund. So, thereafter, I have reduced my debt exposure to zero. Can you please help me choose the right type of debt mutual funds for emergency funds?
- Anonymous

Yes, things have been very disappointing and there is every reason behind investors losing confidence. But you have not lost your money in Franklin Ultra Short Term Bond Fund. If you are an old-time investor, you must have received your share of the segregated Vodafone exposure recently. Further, the AMC is ready with about 16 per cent more.

There was an extraordinary situation, coupled with the extreme vulnerability of this fund, in the month of March when it looked most vulnerable and was caught in fire. And this event disappointed investors. But you have not lost your money. This money is stuck which is very unfortunate as it should not have happened. The fund manager should have anticipated and prepared.

While with hindsight we can say all this, I'm still wary of saying that you have lost this money. I understand that it has caused a lot of heartburn. This was not investors' long-term money and people invested here thinking that this money would be accessible anytime and now it has got stuck. So, all this has been very unfortunate but hopefully, you'll start getting a part of this money gradually.

I feel even in future, we will have to assume some risk to optimise our returns. However, if you want to be completely risk-averse, then we have made an ultra-conservative list of overnight and liquid funds. Our selection of liquid funds includes Axis Liquid Fund, HDFC Liquid Fund and IDFC Cash Fund. I'm hopeful that these funds, given their configuration, will not give you any nasty surprises. These funds will get you lower returns than what Franklin Ultra Short Term Bond Fund used to give and these returns will lower further in line with interest rates. Further, with short-tenure funds, there is no way you can optimise that return. But that's okay as it's your emergency fund, which should just be accessible and not vulnerable to anything accidental.