Module 11   Personal Finance (Part 1)Chapter 11

The Debt funds (Part 1)

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11.1 – The origins of debt

Over the next couple of chapters, we will cover the basics of debt mutual funds. As you may recollect from the earlier chapters, there are about 16 debt mutual fund categories. I don’t intend to discuss all these categories of a mutual fund, because a typical investor does not need these many categories of debt investment. Instead, I’ll discuss the following which I think are essential –

  1. Liquid funds
  2. Overnight funds
  3. Ultrashort term funds
  4. Medium duration
  5. Dynamic bonds
  6. Corporate bond
  7. Credit Risk
  8. Banking & PSU
  9. GILT funds (2 different types)

In my opinion, this is a fairly exhaustive list and will cover many different investment situations which may arise. However, if you would like to know more about a category which isn’t discussed here, then please do post a comment and I’ll be happy to give you clarifications in the comment section.

The debt-oriented, liquid, and overnight funds together constitute nearly 50% of the 27 lakh crore assets under management (AUM) in the mutual fund industry (as of Jan 2020). So as you can imagine, this is a relatively large chunk of investor money. The debt funds play an essential role in the investor’s portfolio, and it serves a variety of purposes, including capital protection.

Before we understand how and when to use a debt fund, we need to understand a more fundamental concept, i.e. the origin of debt. To help you understand this, I’ll take the example of a simple debt structure, which I guess we all would have come across directly or indirectly in our daily lives.

So let’s get started. Assume you want to buy an apartment.


You do your research and shop around for the apartment with a checklist. After an exhaustive search, you eventually circle in on your dream apartment. The apartment comes with everything that you ever wanted – swimming pool, clubhouse, convention centre, supermarket, tennis court, and everything else desirable. The apartment costs you a sweet 1.5Cr, all-inclusive. You have 40L stashed away in your bank, which suffices as the down payment. You still need 1.1Cr to fund the property purchase. How will you source the additional fund?

Chances are, you will approach a bank and request for a loan. The bank evaluates your request and either give you a loan or denies the loan. Needless to say, before deciding to provide you with a loan, the bank will do a ton of background work and dig up every bit of information about you. One of the critical inputs for the bank is your credit score issued by agencies such as CIBIL or Experian. The credit score is a reflection of your creditworthiness, higher the rating the better it is for you and of course, a low credit score implies no loan or a loan at an exorbitant interest rate.

So let us just assume that you have a fantastic credit score and the bank decides to give you a loan of 1.1Cr against your apartment purchase. The details of your loan are as follows –

Credit score: 850

Amount : Rs.1,10,00,000/-

Tenure: 10 years or 120 months

Interest rate: 8.5%

Total interest payable : Rs.53,66,129/-

Total payable (Int + Principal) : Rs.1,63,66,129/-

Monthly EMI: Rs.1,36, 384/-

There are plenty of online calculators you can use to get these details. I’ve used the one available on Bajaj Finserv site. Of course, the credit score is arbitrary here 🙂

These details, along with a bunch of terms and conditions are printed on a document. A stamp paper is attached with stamp duty paid, and the document is registered. Finally, both the parties sign off. A document such as this is called a loan agreement.

Finally, the loan amount is credited from the bank to your bank account. The apartment will remain hypothecated to the bank till the entire loan amount is repaid. The hypothecation works as backup security for the bank. In case you refuse to repay the loan, the bank can sell your apartment and make good their principal and interest.

From the bank’s perspective, the loan is a ‘collateralised loan’, because the loan is secured against collateral, i.e. the property in this case. A collateralised loan is a safer bet for the bank as opposed to a non-collateralised loan.

At this point, I want you to recognise how a debt obligation is created. A debt obligation is created when a person needs to carry out an economic activity for which the fund requirement is far higher than what is available to him.

Going back to the apartment case, assuming things go smoothly, on every month, for the next ten years the borrower is expected to pay back a sum of, i.e. Rs.1,36, 384/- to the bank. The regular inflow to the bank is the ‘cash flow’.

So far, so good, this is a reasonably simple debt structure to understand. Let us now shift focus on the risk involved here.  By risk, I mean the risk involved for the banker, i.e. the lender. What do you think can give the lender sleepless night?

There are a couple of things that can go wrong –

  • Cashflow risk – The borrower can skip paying a couple of EMIs and make irregular repayments. Irregular repayments mean that the bank will take a hit on the expected cash flow, potentially leading to a chain of undesirable events
  • Default risk – The borrower may get into an insolvent situation wherein servicing the loan becomes very difficult; hence the borrower decides not to repay. This is called ‘default’ or the ‘default risk’.
  • Interest rate risk – The loan is given out at a specific interest rate. However, the economic situation may change, and the interest rates may drop in the future. This means that the bank will be forced to reduce the rates, and hence the expected cash flow takes a hit.
  • Credit rating risk – The bank evaluates the borrower’s credit rating at the time of giving out the loan. At this point, the borrower’s credit rating could be excellent. However, for whatever reasons, the credit rating of the borrower can suddenly degrade, thereby increasing the chance of default risk.
  • Asset risk – In case the borrower defaults, the bank has the right to sell the hypothecated property. What if the property itself loses its value? This is a double whammy situation for the lender or the bank. The bank loses both the principal and the asset.

These are the most common risk associated with a debt obligation. We have taken the example of a bank and an individual, the same can be extended to corporates as well.

Imagine a manufacturing company wants to build a new plant. The company needs about INR 800 Crores to commission this plant. How can they raise this money? There are two ways the company can raise this money –

  • Approach a bank and seak a loan, pretty much like the apartment case we discussed
  • Instead of a bank, the company can choose to raise a smaller amount of money from several people (investors). Say in multiples of 20Crs. The company, instead of paying interest to the bank, now pays the interest amount to multiple investors.

If the company takes the 1st approach and seeks a loan from the bank, then the binding agreement is called the ‘loan agreement’. On the other hand, if the company decides to raise this money from multiple investors (multiple lenders), then the binding agreement is called ‘bond’.

Think of a bond as a promissory note from the company to its investors/lenders promising to repay the principal amount at the end of the tenure and a periodic interest amount, also called a coupon.

I agree this is a rather crude and unconventional way to introduce the concept of ‘bond’ to you, but I hope you get the point. A bond is a debt product wherein the lender with surplus capital provides capital to the borrower who requires the capital. In exchange for the money, the borrower promises to pay interest (coupon payments) and repay the full principal at the end of the tenure.

As simple as that.

The risks that we discussed in the bank-apartment example applies to bonds as well. Three risks matter the most when it comes to the bonds –

  • Credit risk
  • Interest rate risk
  • Price risk

At this point, if you’ve managed to understand what a bond is, the risk applicable (very briefly) then I suppose we are off to an excellent start to learn more about the debt funds.

Remember this though – debt funds and the functioning of debt funds is one thing and investing (or trading) the bond is another thing. You as mutual fund investors should only be concerned about three things –

  • When to invest in a debt fund and how to choose one?
  • What a particular category of debt fund does
  • The risk associated with that category of debt fund

The fund manager of the debt fund should be concerned about investing or trading in the bond market.

The bond market is a reasonably big market, not just in India but across the world. Companies often issue bonds to full fill their capital requirements and these bonds are subscribed by the investors.

The mutual fund companies which have the capital subscribe to bonds issued by the companies which have a capital requirement.

With this background, let’s start discussing the different categories of debt funds.

11.2 – The liquid fund

The liquid fund is perhaps the most popular debt fund within the debt fund universe. A liquid fund makes investments in debt products which have a maximum maturity of up to 91 days.

In simple words, the liquid fund invests in debt obligations, wherein the borrower promises to repay the borrowed money (principal) within 91 days (maturity) of such borrowing.

Here is a typical example – Power Finance Corporation (PFC) of India needs  150 Crs to fund its working capital requirement. They agree to repay the borrowed amount to the lender within 50 days. PFC agrees to pay 8.5% interest (also referred to as the coupon) against this borrowing.

HDFC AMC has 150Cr to invest; they see this as an excellent opportunity to earn 8.5% interest; hence they give the funds to PFC.

The deal is done.

After 50 days, PFC repays 150Cr to HDFC AMC along with 8.5% interest.

Note, when any interest or coupon rate is quoted, it is quoted on an annual basis. So this is 8.5% for the 365 days. For 50 days, interest on a pro-rata basis is –

= (50 * 8.5%)/365

= 1.164%

So HDFC AMC will get back 150 Cr + 1.746Cr back from PFC.

I suppose this is a relatively simple deal to understand.

Like I mentioned earlier, a liquid fund by regulation can invest in debt which has a maximum maturity of 91 days. When a corporate entity borrows for such short term basis, they do so by issuing something called as a ‘commercial paper’ or CPs.  In the arbitrary PFC example I used, PFC is deemed to have issued a 50 day CP, which was subscribed by HDFC AMC.

The Government too borrows on a short term basis to fund its short term financial needs. However, when the Government borrows, it does not issue a CP but instead issues a treasury bill. The Government has three variants of t-bills –

  1. 91-day T-Bills, the maturity of 91 days
  2. 182-day T-Bill, the maturity of 182 days
  3. 365 day T-bills, the maturity of 365 days

You can read more about the treasury bills or the T-Bills here.

Now, place yourself as a lender, someone with surplus capital. You are looking for an opportunity to invest 100 Crs. There are two possible borrowers, both wanting 100Crs each –

  • A sugar manufacturer willing to offer 6.5% coupon
  • The Govt of India provides a 6.5% coupon

Whom would you lend? This is a no brainer; you’d give to the Govt because you know that with the Government, there is no credit risk. The Govt will repay, but the same cannot be said about the sugar manufacturer.

Does this mean that the sugar manufacturer will never get the required funds? Yes, as long as the sugar manufacturer offers a coupon equivalent to the Govt, it will be hard for them to source the fund. The lender will lend if he is compensated for credit risk; hence the coupon has to be higher than the equivalent T-bill.

So in this case, the sugar manufacturer should offer say 7 or 8%.

Let’s extend this thought. Assume there are two sugar manufacturing companies –

  • Company A with an impeccable track record. It is in business for 25 years, profitable, and steady cash flows.
  • Company B, five years of operations, breaking even, backed by young entrepreneurs.

Both need 100 Crs. Both offer 8%, you have the money, whom would you lend?

Company A, of course, because company A has a better financial history, hence lesser probability of default.

Does that mean, Company B will never get the funds? Of course, they will, as long as they compensate the lender for the additional credit risk. Hence company B has to offer something like 10 of 11%.

The credit rating reveals the credit risk of a company. The credit rating of the equivalent to an individual’s CIBIL score. The higher, the better, which also means companies with higher credit rating can borrow money by offering lower coupons.

In its portfolio, the liquid fund contains several CPs and T bills, while T bills are relatively safer, CPs aren’t.

This leads me to the most critical point about liquid funds.

 11.3 – Why liquid fund?

People invest in liquid funds to park cash, which they intend to use sometime soon. By ‘sometime soon’, I mean within a year or at the most within a year and a half. The purpose of this investment is to protect the capital, use it in its entirety for the purpose planned. So think about the liquid fund as a parking space for your excess funds.

Question is – why to invest in a liquid fund and why not let it be in a bank’s savings account. Well, people opt to invest in a liquid fund because the liquid fund offers a slightly higher return compared to the bank’s savings account.

The problem, however, is the fact that the liquid fund is often pitched as a better than a savings account (SA) or the fixed deposit (FD)’. This is not true at all. A liquid fund may offer higher than SA/FD account, but also comes with a certain amount of risk.

To put this in perspective, an average SB account rate as of today (Feb 2020)  is 3.5%  to 4% whereas the average Liquid fund gives you a 6% return.

However, the liquid funds consist of several CPs, which are suspectable to credit risk. Here is the snapshot of HDFC’s Liquid funds –

As you can see, HDFC Liquid Funds has several CPs its portfolio. Of course, the credit ratings of the issuer of these CPs are all good, but then things change quickly in the markets. A downgrade in the issuer’s credit rating means a steep cut in the NAV of the liquid fund.

HDFC’s portfolio also has Government securities, which virtual consists of no credit risk, thanks to the implicit sovereign guarantee.

While this is a good liquid fund, it is still not risk-free, you can lose your money if something were to go wrong, which is not the case with a SA or FD.

To give you a perspective of how bad things can go, check this –

This is the NAV graph of Taurus AMC’s Liquid fund. The NAV fell close to 7% on a single day in Feb 2017. All gains were wiped off, and in fact, the investors took a hit on their investment capital. It took almost a year for the fund to recover back to its previous levels.

The reason for this fall was that Taurus had nearly 2000Cr of CPs issued by Ballarpur Industries. The credit rating agencies downgraded Ballarpur’s CPs, and that translated into a 7% vertical fall in NAV.

Anyway, I’d suggest you read this news article, and I think it puts all the discussion we have had till now in some perspective.

So if you are investing in Liquid funds, you need to be aware of a few things –

  • Invest only to park your spare cash
  • Expect a return slightly higher to your SA account
  • Liquid fund is not risk-free, you can lose money when you invest in it
  • Choose a fund which has relatively less default risk – meaning the liquid fund portfolio should have a higher concentration of Government securities.

I’ll stop this chapter here. In the next chapter, I’ll discuss the close cousin of the liquid fund, i.e. the ultra short term fund.

Stay tuned.

Key takeaways from this chapter

  • When a corporate entity borrows funds (for more than one year), they do so by issuing bonds
  • Corporate borrowings for less than a year is done via the issuance of a commercial paper or the CPs
  • When the Government borrows, they do so by issuing a treasury bill or the T-Bill
  • Against the borrowing, the borrower pays interest (coupon) to the lender
  • The lender faces multiple risks when lending funds to the borrower
  • Credit risk and interest rate risk is the primary risk for the lender
  • Liquid funds invest only in CPs and T bills with a maximum maturity of 91 days
  • Liquid fund is not a proxy for a savings bank account; it carries credit risk.



  1. Srinathjayanna says:

    Sir if we have to invest in a liquid fund can invest through zerodha directly,like we invest in equities directly,and where to check for the amount of exposure of cp and government securities for a particular liquid fund.

  2. Rumpa says:

    I have around Rs. 10 lakhs value of Mutual Fund with some other broker. If I transfer the whole amount to Zerodha, then is there any possibility to hedge Mutual fund in Zerodha using OTM Options in Kite against this? I want to generate some return when my MF value goes downside. Is it possible? If possible can you guide me?

    • Karthik Rangappa says:

      Sir, if these units are in DEMAT mode, then yes, you can transfer it quite easily. If it is in non DEMAT mode, then you will have to sell the units, realise gains and then re invest the same. Also, to be fair, if these units are with another broker, then I’m sure the broker allows you to trade F&O, so you can hedge it there itself.

  3. Arvind says:

    Same question

  4. Vijay Swaminathan says:

    Where is the link that continues to explain about other types of debt funds? I wanted to read more about the other types of debt funds. I am not able to find any more chapters that discusses other types of debt fund.

  5. Rumpa says:

    If I transfer it to Zerodha and then want to hedge, can you please provide me any document on how to do this hedging against those MF in Kite?

  6. Srinath jayanna says:

    Sir if the credit rating agencies downgrades the cps and if we want to exit from that fund can’t we exit before the maturity.

  7. Shantanu Chauhan says:

    Hey Karthik,
    Is there any chance you manage any fund? If so, I would like to invest in that fund.

  8. Kris7na says:

    Why are these modules not uploaded or updated in the Zerodha varsity app? It’ll be very convenient to read from there.

  9. vivek says:

    SO. are Liquid Funds Close Ended funds ? ,As Company or government Repays the the due and Fund Closes and Company stating with New Portfolio.

    and If Not the is Liquid Fund Portfolio Changes every time by 91 Day’s?

  10. Jatin Kamboj says:

    when is the next chapters coming ?

  11. Jatin Kamboj says:

    Thanks… eagerly waiting for this…
    And.. why is all the Varsity web content not present on Varsity app yet ?

  12. parvez says:

    update app asap please

  13. Abhinav Saini says:

    I am not getting how NAV is falling upon downgrading of Credit rating? The interest payment on the bond is fixed.

    • Karthik Rangappa says:

      Credit rating is an indicator of a likely default on repayment. If the rating falls, then the probability of default increases, hence the bonds are sold in the market, bringing the value down. Therefore the drop in NAV.

  14. Giriraj says:

    Hey Karthik ,

    You guys at Zerodha are doing great job by helping many budding investors like us. Thank you for bringing financial literacy among young investors of India. These modules on Varsity made me clear on every aspect of investing and trading.

  15. MagicTee says:

    “The bulk of HDFC’s portfolio, i.e. 89.95%, is parked in Government securities” – Just curious how you have calculated this percentage. As I could find from the Feb2020 Portfolio Summary taken from hdfcfund website, this value is only 38.35% and CPs are 42.28% of the portfolio as against 9.12% that you have mentioned. Can you please help me here?

    DEBT INSTRUMENTS -> 9.12% (Non-Convertible debentures / Bonds – 6.34% and Zero Coupon Bonds / Deep Discount Bonds – 2.78%)
    MONEY MARKET INSTRUMENTS -> 89.95% (Certificate Of Deposit (CD) – 9.32%, Commercial Papers (CP) – 42.28%, Gov Sec – 38.35%)

    • Karthik Rangappa says:

      Hey, thanks so much pointing this out. I think I made an inadvertent mistake. I looked at the wrong subtotal. Will change this right away.

  16. Mohammed Sunasra says:

    Hi Karthik,
    Could you shed some light on how the NAV of the liquid fund fluctuates. I know in case of equity MF’s it’s based on the actual share price of the companies but in case of liquid funds the fund lends the money to corporates or government and gets the interest as return. So not sure how the NAV changes here.

    • Karthik Rangappa says:

      It does not change as much as an EQ fund does. The NAV is impacted by the payments received in terms of coupons which results in a change in the fund size and therefore the NAV.

  17. Mohammed says:

    Thanks for the explanation. You mean once the interest is received it would almost always increase right and decrease if the company defaults in repayment?

  18. Dharmendra says:

    hello karhthik,
    Can you please share the link of hedging of portfolio via option. Actually i am not able to find where exactly mentioned in option theory?

  19. ANKIT says:


  20. ANKIT says:

    HI karthik,
    i see the chart of axis liquid fund.
    there is a drop in nav between 15 march 2020 to 30 march 2020.and then it recovered
    what is the reason behind the drop of nav .
    plz explain .

  21. ANKIT says:

    hi karthik,
    on 22 march nav 2186.55
    23 march nav 2184.78
    24 march nav 2183.60
    and after that it recovered
    plz check
    axis liquid fund regular

    • Karthik Rangappa says:

      That would be a minor dip, like any other fund. This is possible given the fact that the entire market (across asset classes) were volatile.

  22. ANKIT says:

    hi karthik.
    can u provide the link of rbi website (ncd issue

  23. ANKIT says:

    hi karthik ,
    when is the best time to redeem our mutual funds (liquid funds) after 2 pm or before 2 pm to get maximum return .
    any experience u can share on this .

  24. ANKIT says:



    • Karthik Rangappa says:

      Bees are exchange-traded funds whereas a fund has a mutual fund structure. Although ETFs are better, they lack liquidity in India. Hence Liquid funds are a better option.

  25. ANKIT says:

    hi karthik,
    returns are better in liquid funds in comparison to liquid bees post tax.
    ur views

  26. Arpit says:

    Hi sir,
    Any platform you would suggest to start mutual fund investment? There are many apps which have come up. Are they safe?

  27. omi says:

    can you suggest other liquid funds .to park for shorter time and pledge to get margins

  28. Sachin Singh says:

    Karthik, most of the liquid funds have something called Certificate of Deposits, which I presume is basically FDs. Can you tell what is their risk factor compared to Commercial paper & T Bills?

    • Karthik Rangappa says:

      1) ‘Commercial Papers’ or CPs, issued by companies. CPs are unsecured
      2)‘Certificate of Deposits’ or CDs. CDs are issued by banks to entities depositing money
      3)T-Bills, issued by the Government, carries sovereign guarantee

  29. Sumsam says:

    How safe are Certificate of Deposit held in the portfolio of Liquid Mutual funds. I assume they are safer than commercial paper. Are they relatively low credit rsk?

    • Karthik Rangappa says:

      They are relatively low risk. But the end of the day, they are all issued by Pvt entities, carries both rating and default risk.

  30. Sumsam says:

    How safe is Franklin liquid fund in todays situation ( ongoing debt fund saga and the pandemic). A glance at their portfolio shows that they are not having any Gov-securities in stark contrast to the rest of the liquid funds available for pledging in zerodha.

  31. Sumsam says:

    I understand that there is some credit and default risk with certificate of deposit, though they may be considered low risk. My question specifically pertains to liquidity risk. Are these assets liquid or do they need to be held to maturity. I assume CDs are not traded and so, can they be redeemed to meet liquidity obligations if required prior to maturity.

    • Karthik Rangappa says:

      Liquidity is generally on the lower side, its best to held to maturity, interim redemptions may not be feasible.

  32. Ashish says:

    Are there liquid funds , which invest in only T -Bills so credit risk can be avoided

  33. Vikas Chawla says:

    Sir, I have invested in Aditya Birla Sun Life Floating Rate Fund – Direct Plan – Growth.
    The returns are so far, so good.
    Kindly share some light on floater debt funds please.

  34. Vipin says:

    Hi ,.
    I am in this lockdown period while doing my government duty .. is too much concerned about my father investment in sbi credit risk regular plan growth. As the investment is around 25 laks it’s been 2 year and 8 months…. Of that investment.. Plz tell is it safe there…. Or I should redeem..plz

    • Karthik Rangappa says:

      Vipin, I’m not a financial advisor, so I cannot advise. Having said that, I don’t like credit risk funds as it carries a high degree of risk. I’d avoid using credit risk fund. Please do check with your financial advisor for this.

  35. Vipin says:

    I have read this module fully and others 4 or 5 modules… Plz solve my one dilema … I have not invested anywhere till now.. now I want to invest for long time.. I am a government employee… With decent earning..But the dilemma is this when high qualified fund manager after using all the knowledge just give 6 to 7 percent return than why we should Not invest money in small saving scheme like PF , SUKANYA CHILD scheme etc… Why go for mutual fund….??

    • Karthik Rangappa says:

      Vipin these are debt funds. Equities have a higher potential. PPF is a great option as well. I will discuss MF portfolio construction soon.

  36. Rashmi says:

    Can you please tell which has low risk commercial papers or certificate of deposit?

  37. vinay rao says:

    Will there be any tax deductions on the interest income which we had earned through liquid funds?

  38. vinay rao says:

    As the interest income from bank fixed deposit is fully taxable ,will there be any deductions on the interest income which we had earned through liquid funds?as it was the short term gain?

  39. Vinith says:

    1. What are Zero coupon / Deep discount Bonds? If they don’t yield interest (assumption), why would anybody invest in them?
    2. Are bonds unsecured like CP’s ?
    3. In the HDFC Liquid Fund example above why is there no coupon% for Treasury Bills?

    • Karthik Rangappa says:

      1) Ppl invest for the discount so that they can redeem for face value
      2) Bonds can be secured or unsecured
      3) T Bills are zero-coupon bills, bought at a discount.

  40. Prithvi says:

    Hi sir,
    I deeply appreciate the great initiative you have taken to educate us. Hats off to your immense knowledge in this field. Thanks a lot for this great content. Could you please suggest further reading to learn more about intraday trading and investing?

    • Karthik Rangappa says:

      Thanks for the kind words, Prithvi. I’m glad you liked the content here.
      While there are plenty of books on investing, I hardly find any on intraday setups. Let me look for it again.

  41. Prithvi says:

    Sir, I have gone through all the modules in varsity but I don’t have practical experience in trading. I became your big fan after reading this invaluable content. Could you please suggest few books on investing?

    • Karthik Rangappa says:

      Happy to note that, Prithvi. At the end of Fundamental Analysis module, I have suggested a few books. Please do give it try.

  42. ANUJ SHAH says:

    I just wanted to know that when can we expect Financial Modelling and Financial Valuation certification course from Zerodha (approx timeframe). I am eagerly awaiting for the same and the 2nd question is
    Are there any certification courses on Mutual Funds that Zerodha is offering and if not are there any plans to launch the same?

    • Karthik Rangappa says:

      Financial modelling I will start maybe by mid-July 🙂
      No certificate courses on MF yet, will probably include one in the app sometime soon.

  43. Sharath M says:

    When i choose to invest in a debt fund which has investments made into CP / T-bills of short maturity period (say 91 days) what happens to the mutual fund after that? I am assuming the fund manager will swap those funds for another fund and continue to maintain the Mutual Fund active. Its like replacing 1 spare part of a machine with a new one.. Is my understanding right?

    • Karthik Rangappa says:

      They continuously invest in securities which have short maturities. Yes, that’s right they churn it regularly.

  44. Rushiraj Bhusare says:

    I don’t understand how a fall in credit rating might affect the return of the CP, for that to happen, the company has to actually default on its payment and the credit rating can fall due to other reasons too.
    It would be better if the mechanism of the credit rating is clarified to me first, I might have misunderstood it
    Thank you

    • Karthik Rangappa says:

      Credit rating in an indication of the probability of default. As and when the probability increases (with credit downgrade), the price cracks. Remember, markets will not wait for the final outcome, it will react much earlier to it.

  45. Rushiraj Bhusare says:

    got it, thanks, stay safe

  46. Prasad says:

    Hi Sir,

    Do you have article about how to select mutual funds and build a portfolio? If you have kindly share

  47. Neil says:

    Hey sir.
    I am sorry but i didnt understand the concept behind these funds.
    Why to diversify between different Government bonds if they are risk-free? Why not to invest in the bond with the highest return directly?
    Thank you.

    • Karthik Rangappa says:

      While risk is one part, you also need to look at returns right 🙂
      You diversify if to improve the overall return profile of the fund and fare better than the rest in the AMC industry.

  48. Prasad says:

    Thanks Karthik for the article. It is nice reading about the concepts. The article about how to select mutual funds will help most of the readers that too when the market is showing lot of opportunities during this COVID pandemic. Many people say to consider multiple factors while selecting mutual fund like past performance and Greeks like alpha standards deviation which is like a bouncer for most of us. Please consider this kind request of writing the article about selection criteria on behalf of majority of the readers at the earliest.

    Am always fan of your article. Storytelling is a good way to convey message in any article and you definitely have it. I have been in and out of equity market since 2008 but without knowing a bit. I was introduced to varsity knowledge base by my cousin in 2018 and ever since I view the market very differently. Kudos to you and your team.

  49. Neil says:

    I am sorry sir. I still didnt understand.
    Yes we have to look at returns.
    Say there are 5 gov bonds in a portfolio.

    Bond A- 5%
    Bond B- 6%
    Bond C- 7%
    Bond D- 8%
    Bond E- 9%

    Now if we diversify between these say equally, then the return will be 7%.
    But if we buy bond E directly then we can get 9% right?

    • Karthik Rangappa says:

      Yeah, but that is if you find a bond which gives you 9% and is also credit risk-free. But hypothetically if this were true, there will always exist a AAA-rated corporate bond with 9.5%, wouldn’t you want that?

  50. Neil says:

    Yes sir, the example was just hypothetical.
    But sir we were discussing about a risk-free bonds.
    Assuming AAA-rated bonds to be risk free as well even then the problem remains the same.
    Why to buy a portfolio of mixed bonds assuming they are risk free when you can buy highest return bond from that portfolio?

    • Karthik Rangappa says:

      AAA Bonds are not risk-free. Only the Sovereign bonds are perceived as credit risk-free…that too internally within the country. For example, S&P can downgrade India bonds..but internally we all know that RBI may not let us down (hopefully). You always need a portfolio to diversify risks of all kinds…known and unknown.

  51. Pramod Patil says:

    in example given above for property, if we take a loan from bank then we give collateral ie our property. If company making any bonds with AMC, then what is collateral that company gives to AMC.
    If the company winds up then the investors money gone forever.

  52. Pardeep Rawat says:

    Hi Karthik,

    From investor prespective, it doesn’t matter when the maturity period of 91 days are getting over for fund manager. Your 91 days period in liquid funds start from the date when you invest and after 91 days, it’s get over. Am I correct?

    What about if I don’t reedeem the money after 91 days, will it roll over for another 91 days (and I could face the same liquidity problems in case I try to sell in between). Please advise.

    • Karthik Rangappa says:

      Thats correct. You as an investor only need to be aware that these funds have 91-day maturity bills in the portfolio and therefore the risk associated with it. You need not have to rollover, you just hold the fund and the fund manager does what he is supposed to do. You can hold it for however long you want.

  53. Shilpa says:

    Do AMC have NAV for liquid bonds as well??

  54. Rohan Mahajan says:

    Hi Karthik, what are your views on Nippon India Liquid Fund Dir?
    Now this fund has NAV around 4930 and I barely get units for 1000 rupees, so is this safe now to stay invested in this fund?
    Appreciate your response on this.

    • Karthik Rangappa says:

      I’ve not checked that specific fund Rohan. But we have discussed the liquid fund, maybe you just put that lesson into practice 🙂

  55. Augustine Charly says:

    Please have a button at end of each chapter linking to this next.

  56. Vidya says:

    Hello Sir,
    Firstly, I am totally new to the markets & financial field but this series has proved to be an excellent starting point – simple, crisp and easy to follow. Thank you!
    My question – Why should I, as an individual opt to invest in a debt liquid fund v/s and FD to park spare cash – from what i gather, the returns and timelines are similar and a bank FD would carry a lower risk on my investment. Is there any specific advantage on choosing a debt liquid fund ?

    • Karthik Rangappa says:

      Thats right, Vidya. At this point, FDs are safer and carries no additional risk. Its just that FD usually has a lockin but you can liquidate your investment in debt fund anytime you wish.

  57. Rahul yadav says:

    Respected sir ,
    I have one question . can an individual apply for fund manager license or only corporate bodies can do that ?

  58. Varun Bhalla says:

    Hi Karthik,
    Just wondered, isn’t T-Bill arguably the SAFEST among all investments i.e even more than SBs and FDs? Ofcourse, the potential downside, not being fixed on long term basis thus having to roll them over again and again.

    Would love to know your thoughts on this.

  59. Ganesh says:

    Is it safe to invest retirement amount in debt funds. If yes, what should be the tenure. Please suggest. Thanks

    • Karthik Rangappa says:

      Depends on your current age. If you are saving for retirement and you are sub 40, then you need to look at equity-oriented funds.

  60. Ashutosh says:

    Hi! Nice article on Liquid funds.

    “182-day T-Bill, the maturity of 182 days
    365 day T-bills, the maturity of 365 days” not a part of liquid debt funds since they have maturity > 91 days? If no, which category do they belong to?

    • Karthik Rangappa says:

      If you buy T bills, then yes, the maturity is 182 or 365 days, however, if you buy liquid debt funds then there is no concept of maturity as that is taken care by the fund itself.

  61. Ashutosh says:

    Right. But if I invest in a liquid fund, does it mean that the AMC Fund Manager can only pick debt instruments wherein the repay/maturity period is 91 days ?
    For e.g., in the earlier chapters you mentioned that Large Cap funds means that the fund manager has to allocate >80% in large cap stocks (and the rest 20% is upto their judgment). Is there a similar mandate here (like >80% has to be in 91 days)?

    I do realize that I don’t need to be really concerned with the concept of maturity when investing in a liquid fund but it helps to know.

  62. Ashutosh says:

    Thanks Karthik 🙂

  63. Ameya says:

    Are Liquid Funds good instruments to store emergency cash?

  64. Ajay says:

    Hi Karthik,
    A fantastic module once again as I am binge reading a lot.
    Could you shed some light on how a reduction in the credit rating of Ballarpur translated to a decline in NAV of Tauras AMC?
    Had this been an equity, i.e a company listed on stock market, a decline in their credit rating would have led to a bearish market sentiment which would mean investors selling and hence a decline would seem justified.
    However, this is a debt fund. What exactly led to this decline in NAV when no market sentiment or selling was at play?


  65. Mani says:

    Sir, in which category liquidbees fall into? is it overnight debt fund?

  66. Mani says:

    Also I have one more question sir, where can one fund HDFC liquid fund holdings sir? – downloads section doesn’t have that information.

  67. Mani says:

    I am trying to allocate my trading money between funds for pledging sir, I listened to DSP liquid ETF video, so there it was explained that they invest through TREPS, so I concluded that liquidbees and liquidETF are like overnight funds. So the risk and returns of overnight fund and liquidbees will be the same. Is my understanding correct sir?

    • Karthik Rangappa says:

      They are slightly different Mani. Overnight funds have securities with overnight maturity, whereas liquid funds have maturities ranging from 90-365 days.

  68. Anant jain says:

    How does downgrading of credit rating translate into losing NAV? Can you elaborate?

    • Karthik Rangappa says:

      Lower credit rating indicates the possibility of a default, which is not really great news for the bonds. Traders dump the bond, driving the price lower and hence the NAV takes a hit.

  69. vaishakh says:

    Do AMC’s collect collateral against the money lended to companies ?

  70. Mani says:

    I checked HDFC, ICICI and SBI liquid funds sir, all the three has more than 50% government bonds, so how to filter further and select one among the three?

  71. Mani says:

    What to look in their portfolio profile sir, sector wise risk or company wise risk? Or any other things sir? Because I saw that all the CP and CD has good ratings.

  72. Mani says:

    k sir, will check it out.

  73. Sanket Salunke says:

    I couldn’t quite understand the risk in CP. Suppose , I purchased some CP offered by a company and due to any reason that company defaulted then , in such cases aren’t there any legal ways by which I can get my money ? Like a share holder gets from company properties etc?

  74. Sachin Jain says:

    Sir, have gone through the entire module. Have one doubt- What’s the benefit of going with Debt funds over FD, since debt funds are riskier then FD and gives the same return in current scenario. What are your views, should we invest in FD or Debt fund ?

    • Karthik Rangappa says:

      Debt funds have an advantage in terms of taxation and also offers liquidity. These are the two big advantages of a debt fund over FD.

  75. Sudhish says:

    Hello Karthik,

    Thanks for the nice article.

    I had invested in the “Indiabulls-ultra-short-term-fund” through the coin, but now Zerodha is saying this fund is no longer active and can not be redeemed. I didn’t find any information in AMCs official website.

    I could sem fund’s AUM is increasing every month from 1783 in November to 1794 in January. How can closed fund’s AUM increase, I could notice all its investment is in TREPs CCIL. Can you share more details on what’s CCIL?

  76. Subhas says:

    Hi Karthik, why all the modules available in varsity website are not available in varsity app?

  77. Debadri says:

    Was looking for further clarification on this: why did the NAV decrease with the fall of credit rating of Ballarpur Industries? They did not default in paying back to Taurus I guess.

    • Karthik Rangappa says:

      Bond prices are sensitive to the probability of default along with the actual default. So when a downgrade happens, the probability increases, hence the bond price decreases.

  78. ankur says:

    Is it possible i can take N number of liquid funds with N number of AMC company with small amount of investment in all of them and whenever required can withdraw money from any one.

  79. Ashok says:

    Hi Karthik,

    Asking this for my understanding. You mentioned NAV will drop if one of the CP in liquid fund ending up in non repayable due to default credit risk. But that is helping NAV to drop is because that whatever the AMC liquid fund invested in that CP is not going to get back its principal ? Is that the right reason ? is there any other reason for drop in NAV if the company defaults credit risk ?

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