Debt Funds vs Fixed Deposits after Coronavirus Meltdown

Last Updated : March 25, 2020, 2:55 p.m.

The coronavirus issue has led to a meltdown in financial markets globally, the worst affected have been equity markets which are down by 30-40% in different countries. The debt funds have been going through a rough patch for the last year or so owing to various rating downgrades and defaults. Names such as DHFL, IL & FS, Zee Group, ADAG, Vodafone, etc, have been some prominent companies whose debt papers have been downgraded or they have defaulted on interest payments.

This has led to some of the debt funds seeing a sharp fall in NAVs which were holding one or all of these papers.

The debt markets were still grappling with this credit crisis and came the coronavirus. Since this crisis, the G-sec yield has declined to around 6.10% and yields in the AAA papers (highest & best rated companies) fell to around 7.20%. There is an expectation that the RBI might cut interest rates to the tune of 50-100bps in the next month or so. A cut in interest rates is already factored in the bond prices, thereby leaving little room for a significant upside for debt funds in the near future.

The projected economic slowdown due to coronavirus might also lead to some more debt defaults in the near future owing to liquidity and cash flow issues. Therefore, for an investor looking to invest in a secured investment option at this juncture, it is better to avoid debt funds for the moment. It will be better to look at debt funds after the credit crisis in some companies is resolved and there is clarity. This could take couple of quarters, till then it’s better to buy a fixed deposit in a reputed bank.