If chosen properly, debt mutual funds can add immense value to your financial portfolio. But, choosing the ones best suited to you out of hundreds of available options, can feel like looking for a needle in a haystack.
Sounds overwhelming, we know! However, if you learn which parameters to gauge when selecting debt funds, you can earn significant returns without increasing your risk exposure.
Even though debt mutual funds park their corpus in relatively safer instruments like government and corporate bonds, investing in them requires a few considerations.
So, here are the 5 things you must consider before making a debt fund investment:
1. Fund’s maturity
Just like any other financial instrument, debt mutual funds too have a maturity date. So, you must match your investment horizon with that of a fund. Otherwise, you might end up taking an unnecessary risk of loss.
Why? Any short-term losses you face staying invested in a debt mutual fund can be ironed out in the long run. But, if the fund closes within a few years, there’s no way for you to make up for any potential loss.
Alternatively, if the fund is performing really well and you’ve recently started making high debt fund returns on it, you would want the streak to continue. This is only possible if the fund doesn’t mature too quickly.
2. Fluctuating interest rates
Know that fluctuating market interest rates significantly influence debt mutual funds. For example, imagine a fund that houses a bond that pays an annual interest rate of 9%. But, if the overall interest rates in the economy fall, a new bond might come at a lower rate, say 8%.
Due to this, investors would want to buy the old bond, thus increasing its demand and subsequently its price. The vice versa is also true where a new bond at a higher ROI will be in more demand.
Now that you know how market interest rates influence debt fund returns, you can hold on to old funds when ROIs are low or quickly acquire new ones when ROIs go up.
Additional Read: Debt Mutual Funds – Myths vs Reality
3. Historical performance
Don’t just look at how a debt mutual fund is fairing in terms of returns today, but also its past track record. Studying a debt fund’s historical return is the true marker of its good or bad performance. Without familiarizing yourself with this parameter, you’ll only be increasing your risk exposure.
4. Fund rating
Before making a debt fund investment, check the fund’s credit quality rating. The ones rated AAA are considered the top rung of the barrel. AA’s or AA+ also make for a worthy investment. Going lower is also not a bad idea if you want to earn higher returns and can stomach a bit of risk.
5. Expense ratio
This ratio shows what percentage of your investment goes towards managing the fund. The lower the expense ratio, the higher your take-home return. Therefore, if you simply can’t decide between two similar debt funds, pick the one with a lower expense ratio.
Additional Read: What are the Best Debt Funds for Short Term Investment?
In the end
Want to invest in mutual funds online but don’t know how? You’re in luck as Tata Capital Moneyfy brings a user-friendly digital portal that lets you compare and invest in all types of mutual funds, including debt mutual funds.
You can also use our Moneyfy app to build your investment corpus through your smartphone. Visit our website and start your investment journey with us today!