Debt Mutual Funds invest in fixed-interest generating securities which include government and corporate bonds, debentures, and other money market instruments which are considered relatively safer than other investment vehicles like equities. Having said that, choosing the right fund is still important. Here, we explain in brief what points you need to consider before investing in Debt Mutual Funds.
Introduction to Debt Funds:
Those who are new to investing make the mistake of directing all their funds into a single investment vehicle instead of investing in a diversified portfolio. An investor needs to cautiously choose funds that expose the investment to multiple asset classes. For every investor, Debt Funds should form some part of their portfolio, however before delving deep into the subject and parking your funds, you need to understand what exactly are Debt Funds and how they work.
Debt Funds are considered to be less volatile and are less risky, but at the same time, they also yield lower returns and come with varying maturity periods. Hence one needs to know which Debt Mutual Funds are best suited for them before they invest.
Here are a few points which would help you choose the right funds:
There are certain parameters that have to be checked in order to pick up the best Debt Funds like average maturity, interest rate, current yield, and so on.
Ideal Horizon is an essential parameter in choosing the right Debt Funds that is often ignored by many investors. One needs to decide on investing in Debt Funds according to its ideal horizon, which ensures there’s no unnecessary risk. Deciding on a Debt Fund according to its ideal Horizon is extremely significant as a liquid fund would be ideal for someone looking for a short term investment whereas a short term debt term would be ideal for someone looking to invest for a period of one year.
Keep a close look at the credit quality of the bonds and debt securities of the Debt Funds you are planning to invest. Bonds are rated by credit rating agencies based on their ability to repay the invested amount.
AAA rating ensures secure investment and one should look for it while selecting a Debt Fund. Also, funds with high-quality debt instruments (AAA or AA+) may be considered as a safe option.
While choosing the right Debt Fund, one should consider its expense ratio as it creates a huge impact on the funds’ performance.
If one considers these points before investing in Debt Mutual Funds, one can expect decent returns of their investments.
