The rule that goes with investment is “one invests money in an equity fund for capital appreciation while in debt fund you park money and earn considerable return”.
After the recent turbulences experienced in debt fund space investors have started asking questions like, is it even beneficial to invest in debt fund? How to decide whether a debt fund is suitable for my portfolio or not? Last year had no good news when it came to debt mutual fund space. Before going further let's just know what is debt mutual fund? A debt mutual fund also known as fixed income mutual funds as it invests a significant portion of your money in government bonds, corporate bonds, debentures, and other money market instruments. By investing in these avenues’ debt funds are less risky.
Debt mutual fund, unlike equity mutual fund, is suitable for the short term, some funds mature at 91 days and the maximum maturity period ranges from 3 to 5 years.
To select the best debt fund, consider the following points before investing –
- Decide your investment horizon and match it with the suitable debt fund – Note that debt mutual fund is suitable for a month’s investment and for 3 to 5 years. So, according to your investment tenure and horizon, you must choose the best debt funds for you.
- Your Risk Appetite – The degree of risk varies from fund to fund so according to your risk appetite choose the best fund for your portfolio. Different risks associated with debt mutual funds are interest rate risk, credit risk, and inflation risk which varies from fund to fund. Eg. Liquid funds carry the least amount of interest rate risk while the gilt fund features the least amount of credit risk.
- Carefully select from the 16 categories defined by SEBI – Select from different funds such as low duration fund, short-duration fund, long-duration fund etc. All these categories are different based on conditions defined by SEBI. Based on your preference and the time for which you want to invest select the funds for your portfolio.
- Are you looking for returns or safety – Investment comes with risk, it is inevitable, even debt mutual funds carry some risk with it. To proceed further you need to first analyze how much risk you are willing to take and thus select funds accordingly.
Types of risks associated with debt mutual funds –
- Interest rate risk – Interest rate and price of a bond are inversely related when interest rate rises the price of bonds falls and vice versa. Interest rate rises in the growing economy. One thing that the investor must also know that longer the duration or maturity of bond higher is the interest rate risk. Gilt funds and long duration funds carry higher interest rate risk than the short duration or money market bond funds. This is because bonds with longer durations are extremely sensitive to changes in the interest rate regime in the economy.
- Credit risk – This risk is associated with funds that are of weaker companies with a credit rating below AA. In this fund, an investor tends to take higher risk and hope for higher returns. Credit risk is the risk of default on a debt security that may arise from a borrower failing to make required payments. If a default were to happen in the security of a portfolio, it would impact the fund to the extent of its weight in the portfolio.
You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).