Debt mutual fund with 22% return! Should you invest?

Legendary batter Sachin Tendulkar took two five-wicket hauls in his 460-odd one-day internationals, but could you bank on him as a legitimate, all-condition bowler for every match? Or was it more a case of lightning doesn't strike twi... urm, thrice?

Unfortunately, the same logic applies to a few of the debt funds delivering as much as 22 per cent returns at this point. You can't rely on them to sustain this performance.

Why some debt fund returns are misleading

The surge in the performance of a few debt funds is not down to smart fund management or a new market opportunity; it is largely the result of recoveries from past credit defaults, an event that won't repeat itself consistently, if at all.

The story behind the one-time recovery

Several credit risk funds suffered in 2018-2019 due to corporate defaults and downgrades, including the IL&FS crisis, which shook the debt market. Funds with exposure to such troubled bonds saw their NAVs plummet.

For instance, DSP Credit Risk Fund delivered a negative two per cent return in 2018, while the credit risk category, on average, recorded a gain of 6 per cent that year.

Moral of the story

Don't chase past returns because, as we said before, recovery of some amount from debtors is a one-off event.

Two, debt investing is more about stability and relatively predictable returns, and not chasing high returns. If you are looking for high returns, look at equity or hybrid funds.

Three, if a debt fund is delivering equity-like returns, it usually means there was a crisis in the past.

What you should do

For investors looking to invest their risk-off money, short-duration debt funds should do the job well. They offer steady returns without excessive risk.

Wondering which debt funds align best with your financial goals? Let Value Research Fund Advisor simplify your choices with expert-curated fund recommendations. Learn more here.

Also read: Bharat Bond ETF 2025 is merging. Is it good for you?