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Don't think debt funds are risk free

Debt funds are safe, but not necessarily risk free as we witnessed in June this year

The FII money in debt funds has gone up significantly and they can exit the markets in short notice as was the case from end May to end June 2013.

  • As long as the yield, adjusted for the cost of hedging against a weakening rupee, is higher than the cost at the source, the FII money stays. The moment this sum threatens to turn negative, the money rushes out
  • You can forego some returns and stick to shorter-term funds. These funds react little and if they do, then they recover quickly
  • If your investment needs are for a fixed-period then FMPs could be a better option
  • You can still ride debt volatility by choosing a good dynamic fund. These can anticipate instability and move to safer short-term bonds depending on the fund manager's skills