"In debt funds, prioritise safety & liquidity"

Debt fund investors tend to be more worried by credit-related risks to their NAV than interest rate-related risks. Why? You need to step back and see the objective of investors who have invested in these funds and the communication they have received from fund houses, advisors or distributors, who sold them the product. Take the case of liquid funds. A liquid fund is perceived, positioned and marketed as a fund that takes no market risks - it invests in less than 91-day securities. It is supposed to be quickly redeemable. Individuals see it as an alternative to savings accounts or bank fixed deposits. Corporate treasuries in liquid funds seek low volatility in returns. So, most people who invest in liquid funds do so more for safety and liquidity than returns. Yet if you see some recent instances of companies where credit risks have cropped up - Amtek Auto, Ballarpur Industries, JSPL, IL&FS - they have been held by liquid funds. That is problematic. Quantum AMC urges people not to invest in liquid funds for returns but to invest in them for safety and liquidity. On a steady state basis, the returns of a zero private credit risk liquid fund, like say the Quantum Liquid Fund, could be about 25 to 50 basis points lower. Usually, the spreads between corporate bonds and government securities in the very short term are quite narrow because there's a very low probability of default within 1-3 months even by an AA issuer. The spreads widen only when incidents like IL&FS happen. But you need to weigh those additional returns you are trying to make against the risk of losing nearly a full year's return if there is a default. The investor needs to answer if she/he is okay with that, on its short-term cash surplus investing. If running a liquid fund only with government s