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Are there any risk-free debt funds?

Dhirendra Kumar advises being conservative while selecting a debt fund

Are investments in ultra-short or low-duration funds risk-free? Also, I feel Franklin India Ultra Short Bond Fund - Super Institutional Plan is a good fund. What is your view?
- Naresh

Franklin India Ultra Short Bond Fund has been a terrific performer for the last few years. It is a well-managed fund. But having said that, if you analyse the credit rating of its underlying debt instruments, you will find that it has an exposure to risky papers. Although there are no concentration at issuer level, it can't be termed as risk-free. No mutual fund is risk-free. Also, risk visits us only once in a while and it is about being prepared for that one time.

If we look at funds which are nearly risk-free, then I would say liquid and overnight funds fit into this category. Given the recent regulatory changes in the design of these funds, they come out as nearly risk-free. As I mentioned earlier, no fund can be termed as completely risk-free and investors must be mindful of the popular disclaimer - Mutual Funds are subject to market risks. Risk can be more or less but there is nothing as being risk-free.

I would like to highlight one point here in the light of the entire PMC bank story that is doing the rounds - even bank deposits aren't risk-free. These are unsecured loans. When banks give you loans, they ask for collateral. However, you do not do the same when you give them money in the form of deposits. Having said that, RBI is there to regulate the banks to safeguard depositors' money.

Coming back to debt funds, I would say have reasonable expectations from them and aim to preserve your capital. Thus, do not run behind a good performer but opt for a conservative one.