{"id":6432,"date":"2025-09-25T16:18:46","date_gmt":"2025-09-25T10:48:46","guid":{"rendered":"https:\/\/1finance.co.in\/magazine\/?post_type=blog&#038;p=6432"},"modified":"2025-12-12T10:53:10","modified_gmt":"2025-12-12T05:23:10","slug":"debt-mutual-funds-negative-returns","status":"publish","type":"blog","link":"https:\/\/1finance.co.in\/1f-dashboard\/blog\/debt-mutual-funds-negative-returns\/","title":{"rendered":"Debt mutual funds and negative returns? Why &#8216;safe&#8217; investments can still lose money"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The very name of debt mutual funds creates a sense of comfort, especially when compared to the volatility of equities. By pooling investments into relatively safer instruments, debt mutual funds are often expected to provide steady returns while protecting capital. But this could be a surprise to you. These funds can, and sometimes do, deliver negative returns; they are not immune to risks.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">That tiny red mark you see on returns can cause quite a stir in your minds. Getting negative returns from debt mutual funds is usually rare and short-lived, but this probability is something you shouldn&#8217;t ignore. Being aware of why they occur can help you avoid panic and make informed decisions.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In this blog, we will learn why you can get negative returns from debt mutual funds, the stories behind the numbers, and what investors can learn from them. But pause, how well do you know about these funds themselves?<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">What are debt mutual funds?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Debt mutual funds are the type of mutual funds that invest in fixed-income instruments that are relatively safer, like government bonds, corporate bonds, commercial papers, and treasury bills. The returns come mainly from two sources: interest income from the bonds held and capital gains or losses when bond prices fluctuate.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">What makes debt mutual funds attractive to investors?<\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">They are less volatile than equities.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">They serve as an option for regular income, which adds predictability.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">They have a range of categories, from liquid funds to long-duration funds.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">They are easier to buy or sell compared to individual bonds.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">They provide easy diversification as they invest across multiple bonds.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">In short, these benefits make investors believe they are relatively safer than equities, but is it truly the case? And from where do investors get this perception?<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Why debt feels safer than it actually is<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Investor psychology plays a powerful role here. The belief in safety comes from the idea that debt equals fixed returns. That \u201cmental anchor\u201d carries over when we look at debt mutual funds, even though the two are structurally different. After all, bonds pay interest regularly, so shouldn\u2019t funds built on them be stable too?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The mismatch between your perception (safe, steady, and guaranteed) and reality (risks, liquidity issues, sensitive to interest rates) is what leads to disappointment when you get negative returns from them.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s look at real-world data that challenged this perception of safety, usually during periods of rate volatility or credit defaults.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Historical cases of debt mutual funds volatility<\/span><\/h2>\n<table>\n<tbody>\n<tr>\n<td style=\"text-align: left;\"><b>Event<\/b><\/td>\n<td style=\"text-align: left;\"><b>Year<\/b><\/td>\n<td style=\"text-align: left;\"><b>What happened<\/b><\/td>\n<td style=\"text-align: left;\"><b>Impact on debt mutual funds<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">IL&amp;FS Default<\/span><\/td>\n<td><span style=\"font-weight: 400;\">2018<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Infrastructure Leasing &amp; Financial Services defaulted on its payments to investors<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Credit risk funds saw decrease in NAV prices due to downgrading credit values<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Franklin Templeton Freeze<\/span><\/td>\n<td><span style=\"font-weight: 400;\">2020<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Six debt schemes wound up due to liquidity crunch<\/span><\/td>\n<td><span style=\"font-weight: 400;\">~\u20b926,000 crore locked, with investors facing losses and difficulty in liquidating their investments<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">COVID Liquidity Crisis<\/span><\/td>\n<td><span style=\"font-weight: 400;\">2020<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Panic redemptions by investors in March 2020<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Even liquid funds gave negative 1-day returns<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: left;\"><span style=\"font-weight: 400;\">Rate Hike Cycle<\/span><\/td>\n<td style=\"text-align: left;\"><span style=\"font-weight: 400;\">2022\u201323<\/span><\/td>\n<td style=\"text-align: left;\"><span style=\"font-weight: 400;\">RBI hiked repo rate from 4% to 6.5%<\/span><\/td>\n<td style=\"text-align: left;\"><span style=\"font-weight: 400;\">Long-duration funds and gilt funds delivered negative returns in the short-term<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"font-weight: 400;\">These examples show that these funds don\u2019t fail often, but when they do, they surely make headlines.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Even \u201csafer\u201d liquid funds weren\u2019t spared. In March 2020, some liquid funds reported 1-day negative returns, something unimaginable for investors who parked <a href=\"https:\/\/1finance.co.in\/blog\/the-weight-of-money-on-your-mind-how-finances-affect-your-well-being\/\">money<\/a> for short-term safety.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Debt mutual funds: Single-day negative returns in March 2020<\/span><\/h2>\n<table>\n<tbody>\n<tr>\n<td><span style=\"font-weight: 400;\">Fund name<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Date<\/span><\/td>\n<td><span style=\"font-weight: 400;\">NAV<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Previous Date NAV<\/span><\/td>\n<td><span style=\"font-weight: 400;\">% Change<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Aditya Birla SL Liquid Fund<\/span><\/td>\n<td><span style=\"font-weight: 400;\">26-Mar-2020<\/span><\/td>\n<td><span style=\"font-weight: 400;\">\u20b9318.28<\/span><\/td>\n<td><span style=\"font-weight: 400;\">\u20b9319.19<\/span><\/td>\n<td><span style=\"font-weight: 400;\">-0.29%<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">HDFC Liquid Fund<\/span><\/td>\n<td><span style=\"font-weight: 400;\">24-Mar-2020<\/span><\/td>\n<td><span style=\"font-weight: 400;\">\u20b93887.4621<\/span><\/td>\n<td><span style=\"font-weight: 400;\">\u20b93889.4852<\/span><\/td>\n<td><span style=\"font-weight: 400;\">-0.0514%<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"font-weight: 400;\">Source: 1 Finance Research<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When people see negative returns in debt mutual funds, even if it\u2019s small and temporary, the fear factor sets in.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Some panic and withdraw immediately, locking in losses.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Others lose trust and vow never to touch them again.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A few stay patient, realizing the dip is short-lived and part of the journey.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Our brains are wired to feel losses more strongly than gains. A -0.5% dip feels way worse than a +0.5% gain feels good. That\u2019s why investors often overreact to what is, in most cases, a temporary blip, even though the same investors might tolerate big swings in equity funds.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Why debt mutual funds show losses and what you can about it<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Along with <a href=\"https:\/\/1finance.co.in\/blog\/risks-of-debt-mutual-funds\/\">the risks associated with debt mutual funds<\/a>, another reason why some show losses is tied to the different strategies they follow. Essentially, debt mutual funds use two main approaches: the accrual (income) strategy and the duration strategy and understanding these is key to knowing why losses can happen.<\/span><\/p>\n<p><strong>What should be your debt mutual fund strategy?<\/strong><\/p>\n<ol>\n<li><span style=\"font-weight: 400;\"> Accrual (income) strategy: <\/span><span style=\"font-weight: 400;\">The fund manager holds bonds till maturity and primarily earns from interest income. These funds are relatively stable and less sensitive to interest rate changes.<\/span><\/li>\n<\/ol>\n<ol start=\"2\">\n<li><span style=\"font-weight: 400;\"> Duration strategy: <\/span><span style=\"font-weight: 400;\">The fund manager invests in long-duration bonds and looks for opportunities to benefit from falling interest rates. But in a rising interest rate cycle, these funds are most likely to show negative returns in the short term.<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">This is why simply asking \u201cDid this fund give negative returns last year?\u201d won\u2019t give you a full answer. Instead, investors should ask:<\/span><\/p>\n<p><strong>What is your investment horizon?<\/strong><\/p>\n<p><span style=\"font-weight: 400;\">Your investment horizon, how long you can keep your money invested. It is one of the most important factors in deciding which type of debt mutual fund makes sense.<\/span><\/p>\n<ol>\n<li><span style=\"font-weight: 400;\"> For short-term goals (like 1 year)<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">If you need the money soon (e.g., child\u2019s school fees, a vacation next summer, <a href=\"https:\/\/1finance.co.in\/blog\/build-an-emergency-fund-or-invest-first-whats-the-right-choice\/\">an emergency fund<\/a>), safety matters more than chasing returns.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You can stick to liquid funds, ultra-short-term, or low-duration funds.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Avoid long-duration funds. Even a small interest rate hike can cause temporary losses, which you don\u2019t have time to recover from.<\/span><\/li>\n<\/ul>\n<ol start=\"2\">\n<li><span style=\"font-weight: 400;\"> For long-term goals (like 3-5 years)<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">You can consider long-duration funds for your long-term goals. These funds benefit from falling interest rates, but can see a dip when interest rate rises. That\u2019s why they are best entered with a favorable interest rates outlook, ideally after <a href=\"https:\/\/1finance.co.in\/talk-to-a-financial-advisor\">consulting a Qualified Financial Advisor (QFA)<\/a>.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Negative returns are usually temporary, and happens when the wrong strategy is matched with the wrong horizon.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">A debt mutual fund investment: A quick checklist for you<\/span><\/h2>\n<ol>\n<li><span style=\"font-weight: 400;\"> Have clarity about your goals.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> Match your time horizon with the fund\u2019s strategy.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> Check the credit quality of a debt scheme, not just its returns.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> Don\u2019t react to daily NAV movements.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> Diversify across different debt categories.<\/span><\/li>\n<\/ol>\n<h2><span style=\"font-weight: 400;\">Summarizing,<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Getting negative returns from debt mutual funds is possible. And being aware about it helps you stay prepared rather than surprised. However, negative returns don\u2019t make these funds any less good investment options. It usually means the fund wasn\u2019t the right fit for your time horizon and investment goals. If you match your goal and investment horizon with the right strategy, i.e., accrual for short-term and duration for long-term goals (with proper guidance), debt mutual funds can be a good investment decision.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Learn why debt mutual funds can lose money even when considered safe.<\/p>\n","protected":false},"featured_media":6683,"comment_status":"closed","ping_status":"closed","template":"","meta":{"_acf_changed":false,"_updated_date":""},"blog-category":[273],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.11 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Debt Mutual Funds And Negative Returns? 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