Mutual Fund investments demand a fair bit of thought and consideration as these investments have certain risks that may not suit every type of investor. If you’re wondering whether to go the equity way or down the Debt Fund path, let us give you a few handy factors that you need to keep in mind when choosing the right Debt Funds.
Let us tell you what Debt Funds are
Debt Funds are those that invest in both fixed income securities and debt securities such as money market instruments among others.
There are broadly three types of debt funds:
- Short term funds
- Medium to long term funds
- Fixed maturity funds
There are a few things you must remember while choosing Debt Funds.
Interest Rate Risk Vs Credit Risk
If you are willing to stay invested from anywhere between 6 months to 2 years, Debt Funds can be a suitable investment option for you.
- Now, what is interest rate risk?
Debt Funds usually take interest rate risks or credit risks. Interest rate risks occur when the fund manager adjusts the maturity value of a fund depending on the prevailing interest rates. A rise in interest rates means a decrease in the bond prices.
- Then, what is credit risk?
When fund managers invest about 40-50% in AA rated or lower rated investment instruments, that is a credit risk.
- What is the exposure to government securities?
Some short-term Debt Funds take limited exposure to government securities as government securities have a long maturity.
- Exit Load
Does your Debt Fund have an exit load? This is a penalty charged on exiting the fund.
- What is the size of the scheme?
Debt Funds generally attract investors who change very frequently. If the size of the Debt Fund is small, then it could become volatile if several investors are constantly entering and exiting the fund.
Here’s a tip: Look for schemes that have a corpus value that is more than Rs. 300 crore.
- What is the Expense Ratio of the fund?
The Expense Ratio of a Debt Fund is an important factor to consider because the returns of Debt Funds are usually lower than equity fund returns.
Here’s a tip: It’s a good idea to select a Debt Fund that has an Expense Ratio less than 1.5%.
- Quality of securities
Review the portfolio allocation of the fund. Avoid schemes that invest in low credit schemes. Investing in a fund that has a high exposure to government securities is also not a good idea.
Additional Reading: Set Your Goals Before Investing In Mutual Funds