March 2, 2024

How to Choose the Right Debt Fund for you

 When earning a regular income, it is crucial to ensure that you have savings that go beyond simply having excess cash in hand. Making investments in various tools and schemes are quite beneficial in the long run. Not only can they be withdawn when in need but also earn interest which can grow over time.

Opting for debt mutual funds can be quite beneficial, as they can help in generating wealth over time. You can consider investing your earnings in various instruments such as money market instruments, government securities, treasury bills, and corporate bonds, among others.

However, you may need to consider certain things to keep in mind while going for this form of investing. Learn more about the types, features, benefits and more, before choosing debt funds.

 Types of debt funds

  1. Income Funds: These funds are known to make investments in a wide range of debt instruments from several issuers and maturities, wherein most are medium to long-term. These are ideal for those with a higher risk appetite and a considerably longer investment horizon.
  2. Money Market and Liquid Funds: Investments in this fund are made in highly liquid debt securities and money market instruments, featuring short tenures. Their primary objective is to earn in the current market rates.
  3. Short Term Funds: In this fund, investments are made in debt instruments that have a comparatively shorter duration for maturity. These can generate substantial returns despite having a small tenure, as the interest rates can be high.
  4. Floating Rate Funds: These funds majorly make investments in instruments that offer a floating interest rate, wherein the main objective is to bring down the investment returns’ volatility. Here, the interest rate gets reset on a periodic basis, as per the interest rate’s movement.

  Features of debt fund investments

Here are some features of debt funds that you can consider before choosing to invest:

  1. Steers clear of market volatility – Investments in debt funds are not linked to market conditions, and are made in a fixed maturity period, along with a specified interest rate.
  2. Portfolio stability – The associated risks with debt funds is significantly lower than those of equity instruments, thereby making this a stable addition to your portfolio.
  3. Liquidity – Making investments in debt funds is a suitable way of developing a cash reserve as these can be redeemed quickly when you require funds urgently.
  4. Ideal for new investors – Since this is a relatively low-risk form of investing and is suitable for beginner investors who have a low-risk appetite, as the returns are guaranteed.

Factors to consider before choosing debt funds

Learn about certain aspects to keep in mind while deciding to invest in debt funds:

  1. Transaction charges

A one-time nominal transaction charge will be levied to you while making investments of ₹10,000 or over in debt funds and SIPs. These are paid to the distributors or intermediaries that are selling the fund. At times, these charges also go towards opening and maintaining a demat account or brokerage expenses, among others.

  1. Yield to Maturity (YTM)

This refers to the portfolio constituents’ weighted average yield, and can help provide a good idea of the potential interest income that can be earned. Investments in fixed income instruments with higher coupon rates feature higher YTM than most others.

  1. Average maturity and modified duration

A debt funds’ average maturity is considered to be the weighted average of all debt securities’ current maturities, while modified duration refers to a fund’s sensitivity to policy rate changes. Debt funds that feature a higher average maturity and modified duration are more sensitive to interest rate changes.

  1. Portfolio constituents

Debt funds are known to mention the credit ratings of the respective portfolio constituent in the fact sheet, which highlight the creditworthiness of the securities’ issuer. For instance, those with a rating of AAA feature the lowest credit risk, while the ones with a C rating tend to have a high default risk. Reviewing a fund fact sheet will help provide you a good idea about the debt funds’ credit risk exposure and more.

  1. Past performance of the fund

Tracking your preferred debt fund’s performance history can be key in potentially determining its trajectory. It is recommended to go for the ones that are not only well-known or established but have also consistently performed well. For this purpose, using the help of fund managers will be beneficial and more in line with your investment objectives.

 Debt funds are one of the safest ways of investing as it comes with minimal risks and guaranteed returns. Now that you have a good idea regarding what you need to know before choosing the right fund, don’t wait any longer and start investing in some of the top-rated mutual funds!

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