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Can short-duration debt funds generate consistent risk-free returns?

You have to lower your expectations from debt funds, as the appreciation that had to happen in these funds has already happened, says Dhirendra Kumar

Are short-duration debt funds a safe option to generate consistent risk-free returns? These funds have given more than 8 per cent return every year till now and look attractive in the current market scenario, as interest rates in fixed deposits are decreasing every other month.
- Rohit Saxena

The return that we have seen from debt so far is unlikely to be repeated in the near future or even medium-term future, as interest rates are low and I don't think they'll go up in a hurry. The appreciation that had to happen in debt funds due to interest rates coming down has already happened. You have seen high gilt funds returns during the worst of equity times. So, we have to lower our expectations, as it is not going to get repeated.

At the same time, there is also great risk. You have seen the Franklin crisis and there could still be some risk lurking ahead. We know the economy is not in great shape and some of the companies which borrowed money may fall into difficulty. If they don't repay their obligations on time, some of these funds may get downgraded i.e. a decline in value. Further, some of the bonds issued by those companies may default. So, you have to be extremely careful.

For a marginally higher return, don't put your capital at risk. I would like you to err on the side of caution. So, look for a conservative short duration fund. For a half or 1 per cent more, you can't take risk where your 100 per cent capital may get stuck. So, settle for lower returns and be mindful of your asset allocation. Invest some part of your money in equity steadily at least for five years. Equity investment will act as a hope of producing better returns to supplement your returns from fixed income.