Why debt mutual funds fell last week along with equity funds

Here is why debt mutual funds also have negative returns last week (9-13 March 2020) along with equity mutual funds

plot of five year gilt yield with daily change since 1st Jan 2020 highlighting the sudden increase in yield over the last few days. Data source: Investing.com

Published: March 15, 2020 at 9:31 am

Last Updated on

Many investors were shocked to see their debt mutual fund NAV fall last week ( 9-13th Mar 2020) along with equity funds. Regardless of whether they were credit risk funds or banking and PSU funds the NAV fell. Many were left wondering, “which bond defaulted?”.  Debt fund NAVs can fall due to a variety of reasons. Here is the reason for last weeks fall.

Debt fund investors should understand that the NAV of a debt fund can change in three primary ways: (a) To reflect the interest income the bond in the folio receive, the NAV will increase a little each business day. (b) Longer the duration of the bond in the portfolio, the more sensitive it will be to demand and supply changes. (c) NAV can change when the credit rating of the fund changes.

Update 20th March 2020: Also read:Why Liquid funds and money market funds also fell in the last few days

What happened in the bond market last week was a change in demand and supply. Foreign Portfolio Investors started selling Indian bonds resulting in a sudden loss of demand. When demand goes down, bond prices go down, the NAV goes down.

Market demand and supply is measured with the Bond yield =  interest income/ current price. When prices fall, the yield shoots up. Longer the duration of the bond, more will be the fall in price if demand falls, more will be the increase in yield, more will be the fall in NAV.

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It does not matter if the bond is gilt or AAA-rated. A sudden mismatch of sellers and buyers (sellers > buyers) will lead to a fall in the NAV. The image above shows how the five-year gilt yield shot up in the last few days resulting in trailing one-week (one-month) negative debt fund returns. It would also affect hybrid funds to varying extents.

The corresponding picture for the ten-year gilt is shown below. A corresponding and proportional variation will be in seen in bonds of different duration and different credit rating. Data source: Investing.com.

plot of ten year gilt yield with daily change since 1st Jan 2020 highlighting the sudden increase in yield over the last few days
a plot of ten-year gilt yield with daily change since 1st Jan 2020 highlighting the sudden increase in yield over the last few days. Data source: Investing.com

To understand how debt funds holding longer duration bonds are affected more, this is a plot of last one-week debt fund returns vs average portfolio maturity in years (x-axis). Data source: Value research.

plot of last one week debt fund returns vs average portfolio maturity
a plot of last one-week debt fund returns vs average portfolio maturity. Data source: Value research.

Only funds holding short-term bonds like overnight funds, liquid funds, money market funds were largely spared. Notice how the fall in NAV increases as the average maturity increases.

This is how a stock market crash can simultaneously affect the bond market. Let us wait and watch how the next week unfolds.


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  1. Thanks for the insight; I was wondering why the debt funds NAV went down.
    One question – Given the economic impact and consequences of Covid-19 pandemic, companies will suffer from falling demand and revenues and there may be further liquidity crunch; could that lead to companies/bond issuers defaulting on their interest payments causing debt funds to fall further or crash as well?
    With DHFL, Vodafone, etc.. we’ve seen the credit risk play out in debt funds, so wondering if the current economic crisis would lead to further risk of defaults in debt funds.

  2. Exceptional post Pattuji. So much for the theory that debt, gold and Equity will move in different directions. Even gold ETF prices have started coming downward by about 8-10% in the last one week, when everybody expected it to shoot up. I noticed a small dip in my Ultra Short bond fund NAV and a large drop (-5%) in a Hybrid debt (Gilt + Corpororate) fund I hold, and was wondering WTH?

    There is a Chinese Curse – “May you live in interesting times’. These are interesting times indeed.

  3. I heard one of the reasons for debt fund fall is due to AT1 bonds of yes bank made zero and mfs hold a lot of them. Unlike other bonds of zee or rel comm there was some scope of recovery this one Has been written down to zero.

  4. In Oct 2008 Stocks in EMs and commodities crashed. But bonds did not react as FIIs had already fled. But after one month local investors were seeking safety of gilts. Then during Sep – Dec qtr. 2008, Gilt funds gave a return of 25% and 10 yr yield fell to 5.3. Now the same thing appear to be repeating. Depending on US rates, if it touches 0, then 10yr bonds could touch 4.5. This will result in super return in 10 yr gilt funds.
    FIIs have been exiting all winning positions worldwide and going to cash as they are liquidity starved especially in USD to cover leveraged margin calls .

  5. Hi sir,
    Your articles are awasome,so many things i learn from your articles, always my confidence boost whenever I read your article.
    I request to you please write in hindi so all people will understand very easy.

  6. Pattu Sir,

    Please guide on guilt fund. your review for SBI Magnum Constant Maturity Fund. Is is guild fund suitable for retail investors ?

  7. Thank you. This is what I have been looking for some time. I always wondered on how debt categories will react to a real crisis situation and this serves as an extremely good example. That NAVs will go down in case yields shoot up whether or not a credit event happens (which is always likely to follow in a real crisis situation). In such cases even having aggressive hybrid fund does not matter much if the sole purpose is to have better cushioning in real crisis events. In such cases your recommendations of going on pure equity + pure debt seems to be more solid approach.

  8. To support with liquidity in these times, U.S. , U.K. further reduced interest rates. India didn’t reduce but promised liquidity. I want to know, won’t debt fund with long term maturity papers give good returns in 6 months to 1 year? HK

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