These days, people prefer mutual funds because it adds a lot of value to their otherwise conservative portfolio. Young investors these days stay aloof from conservative investment avenues because of the extremely low interest rates on offer. Instead of investing in traditional investment avenues, risk averse investors can consider investing in debt mutual funds. Debt mutual funds offer stable returns and although they may not offer capital appreciation like equity mutual funds, these are relatively lesser volatile as well.
A debt mutual fund is an open ended scheme that invests the majority of its investible corpus in fixed income securities like corporate bonds, government backed securities, treasury bills, commercial papers, certificates of deposits, etc. Since these funds predominantly invest in government backed securities, they are considered to be far less volatile than equity oriented schemes.
There are certain important things which investors must take into consideration while choosing a debt mutual fund. If you are looking for an ideal debt mutual fund scheme, here are a few things to remember:
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Average Portfolio Maturity
If you want to avoid unnecessary risk, you must ensure that your investment time horizon remains aligned with the portfolio maturity period of the debt fund. For example, if you invest in a liquid fund for a longer duration it just doesn’t make sense as liquid funds invest in a portfolio of debt instruments that have a short maturity duration. Hence, if you wish to invest for a longer duration, then you may consider other types of debt schemes like gilt funds with 10 years maturity or a long duration fund.
Changing Interest Rates
The current interest rates will play a direct role in determining whether your investments in debt funds can or cannot generate returns. Bond prices and interest rates usually share an inverse relation. Whenever there is a rise in the interest rates, the bond prices fall and vice versa. When interest rates are high, new bonds with higher yields are introduced in the market. This attracts investors and thus, older bonds lose their value. So, if your debt fund has invested in such old bonds, the value of its NAV will also fall down.
Underlying Securities
The debt securities in which the fund invests are rated by various credit rating agencies like CRISIL, SMREA, etc. Debt securities that have AAA+, AAA ratings are considered to be of high credit quality. Such securities are less likely to come in the defaulter’s list as opposed to securities with AA, AA- or similar ratings. However, debt securities that are considered to be less safe have the potential to generate higher yields.
Asset Under Management (AUM)
Now some experts may argue that the AUM is not that important as some funds that are new may witness fewer AUM as opposed to funds that have been running for many years. However, a fund that has a high AUM only speaks volumes of the trust which the investors have in the AMC and the management running that particular fund. Investors who are new to mutual fund investing must consider a debt scheme that has a noticeable AUM rather than going with a brand new scheme with insufficient historical data.
Total Expense Ratio (TER)
An expense ratio is nothing but the recurring costs like management and operational costs which the AMC recovers through investors. A debt mutual fund with a high expense ratio may swallow a decent chunk of the investor’s overall capital gains and hence one must invest in a debt scheme that has a feasible expense ratio.