Debt Mutual Funds: How to choose the right debt funds?

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debt mutual fund

Investing in mutual funds is a popular decision made by investors worldwide. Among the various types of mutual funds available, debt funds are considered a safe bet, especially for conservative investors who prioritize capital preservation over high returns. However, choosing the right debt funds is crucial to meet your investment goals. Lately, several investors are considering debt funds as they carry relatively lower risks as compared to equity funds. Yet, without proper understanding and evaluation, even the safest investments can give undesirable results.

Debt funds, as the name suggests are mutual funds that invest in debt instruments like government securities, corporate bonds, commercial paper, treasury bills, and other fixed-income instruments. They are ideal for investors who prefer a stable income and do not wish to expose their investments to extreme market volatility. Before investing in debt funds, investors should evaluate the following factors to make the right choice:

Risk: Although debt funds are generally lower in risk than equity funds, they are not completely risk-free. Credit risk and interest rate risk are the two primary risks associated with debt funds.

Returns: While debt funds may not provide high returns equivalent to equity funds, they tend to provide steady returns. While comparing funds, look at the past performance and returns in the past 3 to 5 years. Choose the fund that has consistently provided stable returns.

Exit Load and Expense Ratio: An exit load is charged when you withdraw your investment before a certain period. On the other hand, the expense ratio is the percentage of the fund’s assets used for its management. Both these parameters will affect the net returns from a debt fund.

Fund House Review: Always invest with reputable fund houses that have a stable past and robust system. Evaluate the history of the company and its performance during different economic conditions.

Macaulay Duration: This is a unique concept in debt funds. It gauges how long it will take for the investor to get back their principal amount invested in the fund.

The choice of debt funds should primarily depend on the individual’s investment goals and risk tolerance. A short-term debt fund is suited for investors who want to invest for a period of 1-3 years and wish to take limited risk. On the other hand, long-term debt funds are suited for investors who do not mind taking a moderate level of risk for better returns. Download Bajaj Finserv App to choose the right mutual fund.

While the principles of financial markets remain constant across various countries, it is crucial to understand and adjust your investment strategies according to the characteristics of the specific market, national, or regional economy. In the context of the Indian market, for example, the choice of debt mutual funds should also be influenced by macroeconomic factors, policy decisions by the Reserve Bank of India and the government, and the underlying currency risk associated with the Indian rupees.

Lastly, before investing, take note of the disclaimer that investing in the market, including debt funds carries the risk of monetary loss and that an investor should always make an informed decision after gauging all the pros and cons, and consulting with a financial advisor if necessary.

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