InvestorQ : What will be the effect on Debt funds if suddenly market crashes and Nifty comes below 11k?
Neelam Naik made post

What will be the effect on Debt funds if suddenly market crashes and Nifty comes below 11k?

Aditi Sharma answered.
2 years ago

I am not sure as to the impact that the crash will halve on the debt funds because there is little connection between the debt funds and the equity market performance. However, the following factors could have a deep impact on the debt fund performance.

· The fiscal deficit will have a major impact on debt fund performance. If fiscal deficit is more than 30-40 basis points above the 3.3% mark then it could create fears of higher government borrowings and higher bond yields. That will be negative for debt funds.

· Secondly, the inflation rate could also be the key to debt fund performance. Inflation has already touched a high of 7.35% in December and any further spike will push the bond yields to higher levels. With food inflation still sticky, inflation may continue to reign high and that may push up bond yields further.

· Thirdly, the RBI policy and language will be closely watched. The RBI has not cut rates in the last policy but if it starts talking in hawkish tones in the next two policies then bond yields could move back to the 7% mark and that would be negative for the bond yields and push down bond prices in the market.

· Lastly, you must keep an eye on companies like Zee, DHFL, IL&FS, Jet Airways and even Vodafone Idea. Debt funds have large exposures to these stocks and any large write offs on these bonds can have a negative impact on the bond market yields and the bond prices.

Equity markets may have limited impact but these are the factors to watch out for.


Sam Eswaran answered.
2 years ago
Any crash in the equity market would not impact debt funds much as there is already a lot of volatility in the market. Debt funds are generally not impacted by the market fluctuations which makes them more reliable investment options under volatile markets.

However, it is also true that during a slowdown in the economy, the capability of the company to meet out its debt gets reduced and they face problems to meet their obligations. Even the highest-rated companies are downgraded during this phase, which leads to a reduction in the value of these bonds. Companies are unable to perform as they do in the normal course of business such as borrowing fresh capital and paying the matured amounts, this becomes difficult during sluggish markets which in turn decreases the value of underlying assets under debt mutual funds.

Another major reason that could have an impact on the valuation of debt funds is increasing the fiscal deficit gap. The more this gap increases, the more it will become negative for the debt market. Therefore, during the recession, the market is at its lowest point, which requires close monitoring and smart and timely moves in investments.