Debt funds play an important role in de-risking and stabilising your investment portfolio. At Value Research, we've always preferred short-duration funds to be the core of your fixed-income allocation. After a drop in the aftermath of the IL&FS crisis, the category's assets have risen substantially. Having said that, due to the pandemic and the consequent low interest rates, we are seeing most fixed-income funds delivering low returns. This category has been no different. In recent months, we have received quite a few queries from subscribers on diverse topics ranging from the relevance of short-duration funds over fixed deposits to the interpretation of the PRC matrix to an uptick in volatility experienced by these funds. We answer all of them in this update and bring you up to speed with other emerging trends. FDs better than short-duration funds? If you look at the one-year rolling returns of these funds, the category of short-duration funds is currently standing at one of its lowest return levels in history. Some of our readers ask us about the merit in shifting to FDs for now and later moving to these funds. While the FDs look good on a pre-tax basis, their returns go awfully low when you factor in the taxes. Additionally, short-duration funds are much more liquid. What's with the volatility? While it's common for equity markets to witness commotion now and then, the ups and downs in the debt markets are also ruffling some feathers these days. Some investors have been enquiring about the instances of negative returns they are experiencing with their debt funds since the start of the year, somewhat worriedly. So here we put things in context. The category of short-duration funds has reported negative returns (on average) on a little over a fourth of the total traded days this year. This is pretty much in line with the trends in the preceding three years. Therefore, these funds aren't reporting negative returns on more days than they had in the past. Even the magnitude of the fall isn't any higher. So, nothing much has changed on that front. But admittedly, we are in a noisier environment due to an uptick in inflation and the unfolding global macroeconomic factors. Unlike the last two years, we are entering a phase of relative uncertainty in the debt markets. On one side, RBI has vocally stated
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