"Most of my clients are not willing to invest in debt mutual funds anymore. They feel debt mutual funds are not worth the trouble.""I don't think the extra one or two per cent returns justify the recent troubles in the debt mutual fund space. I am better off with a bank deposit. At least I will have peace of mind."The sentiment expressed in the above statements, one from a mutual fund advisor and the other from a conservative debt investor, adumbrates the scenario in the debt mutual fund space. The spectre of defaults and downgrades have shattered the faith of many conservative investors in the debt mutual fund space. Part redemptions, rollover of FMPs, unilateral settlements with promoters ... every theoretically-possible nightmare was played out in the debt mutual fund space in the last few months.Everybody, be it advisors or investors, are asking out loud whether it is worth taking the extra risk to earn the extra one or two per cent returns. Sure, most advisors and investors are still sitting on the fence, but many have abandoned debt mutual funds. They do not want to use these schemes to achieve their short-term financial goals anymore.Sure, debt mutual funds indeed earned bad names for themselves in the last one year. Unilateral agreements with troubled businessmen by some fund houses and their poor communication strategy indeed managed to turn many investors extremely hostile, something many mutual fund advisors find tough to handle. But are these schemes broken beyond repair? That is a point you should dwell more.Mutual funds are governed well by Sebi, at times micro-managed to the discomfort of fund houses. The recent fiascos have caught the attention of regulator as well. And Sebi recently issued a whole set of new regulations to make these schemes more transparent and less risky. Gone are the days when fund houses can be magnanimous to their corporate borrowers by striking stand alone deals. They are also subject to new sectoral caps and all investments will be marked to market to show the real value of them.To know more about the recent changes in guidelines, read : Sebi new norms will make debt mutual funds more liquid, diversified, safer Now, there is something you can do to ensure your peace of mind if you are ready to rethink about investing in debt mutual funds. Since you know now the so-called theoretical risks do not remain only in text books, it is time take the risks associated with debt mutual funds seriously.One, all debt mutual funds have some amount of risk in them. Two, some debt mutual funds can be extremely risky. Example: credit risk funds . Three, some debt funds can be extremely risky in certain phases in the market. Example: long term debt funds in a rising interest rate scenario. Four, all risks come into the fore in full strength in a very bad phase in the market. So, do not take any risks lightly, especially if you are in a vulnerable life stage like retired. A young person can afford to lose money as he has a lot of time to make up for it. You don’t have it, so you shouldn’t risk it.If you can’t afford to take risk or lose money, stick to bank deposits, overnight funds, liquid funds, and ultra short duration funds. They will offer you less, but your chances of losing money are also lower. Only you are ready to take extra returns for extra returns, you should consider debt funds with longer duration. Again, stick to short and medium duration funds if you want to play relatively safer. Opt for longer duration funds only if you are investing for a long period and can afford to take more risk.Want to know more about how to navigate the troubled debt mutual funds? Watch this space, we are putting together a series of articles- including basics, columns, interviews, and so on - on debt mutual funds: