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Will a stock market crash impact debt funds?

Dhirendra Kumar explains different variables that have a bearing on the fixed-income market

What will be the impact on debt funds if the stock market crashes?
- Amit

There won't be much impact on debt funds if the equity market crashes because the dynamics of the fixed-income market are very different. What has a bearing on debt funds is the general state of the economy and inflation rates. If inflation goes up, interest rates go up. Bonds are hit if interest rates go up. They benefit if interest rates go down.

The other factor that impacts debt funds is the credit quality or rating of the bond. If a lot of companies are in difficulty and face problems in terms of poor economic conditions, and if they are unable to honour their interest and principal repayments on time, that will lead to a deterioration in the credit rating, which will impact debt funds.

The third thing is liquidity. Liquidity in the system reduces the charm of money in the short term. So these are the three broad variables that impact the fixed-income market.

There is just one connection between the equity and the debt market. When interest rates are low, people get attracted to the equity market. Simply because they feel that it may be worthwhile to assume some equity risk for higher return as they are getting very low returns without assuming any risk.

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