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In the current scenario, which type of debt fund is safe to invest in?

Dhirendra Kumar advises sticking to ultra-short-duration and liquid funds for a horizon of 12-18 months

In the current scenario, which types of debt funds are safe to invest in if my investment horizon is 12 to 18 months?
- Pradeep Garg

For such a time horizon, I think you should not look beyond ultra-short-duration and liquid funds. We have already seen the first round of the rate cut and it can further accelerate. But don't try to optimise your return in fixed-income investments simply because it's just not worth it. We are still not out of the credit crisis that we have been unfolding since 2018. Worst might be behind us but it is still difficult for investors to choose a fund that is completely insulated from such risks. Also, it may not be worth the anxiety. So, with this kind of time frame, go for ultra-short-duration and liquid funds.

I would also like to add that, this time we witnessed that in a fairly routine way, liquid funds also declined in value. Nevertheless, the decline was not of a kind that would worry investors. The scale of risk was nothing as compared to the devastation that we are seeing in equity. So, there is a risk in debt funds too. The last four months have been a grim reminder of the disclaimer that mutual funds are subject to market risk.