: Do you want to invest in debt mutual funds? But it’s good to know a few things first. Mutual funds invest in fixed income securities like bonds and treasury bills for better returns. A mutual fund is an investment vehicle consisting of a portfolio of stocks, bonds or other securities managed by a fund manager. Popular debt funds are gilt fund, liquid funds, Monthly Income Plans (MIPs), Short Term Plans (STP) and Fixed Maturity Plans (FMP). In addition to these, debt funds also have various funds that invest in short-term, medium-term and long-term bonds. By investing directly in stock markets, the risk of loss is high. People who don’t want to invest in equity market due to market volatility mostly opt for debt funds. But the returns are less compared to stock market investment. But it often pays off. There are five important things to consider before investing in debt funds. That is..
- Credit Risk, Interest Rate Risk: No investment is without risk. The same applies to debt funds. Debt funds involve credit risk and interest rate risk. It is said to be riskier as compared to bank fixed deposits. Credit Risk Your fund manager may invest in lower credit rated securities. They are more likely to default. A rise in interest rates can cause bond prices to fall.
- Average Maturity: A good way for investors to understand whether a debt fund is suitable for their financial objective is to check the average maturity of the fund. Debt fund managers can invest in debt papers with maturities from one end of the spectrum to the other. Average Maturity is the tenure weighted average of the current securities in the fund.
- Returns: The most important factor when considering any investment is its return. After deciding whether this particular fund fits our investment horizon we should check the past returns. Although past returns do not guarantee future returns, they serve as an indicator.
- Assets Under Management (AUM): A fund’s total assets managed is its AUM. It is basically the current investment value of the investors. Retail investors should always invest in debt funds with large AUM. A larger fund manager can negotiate for better interest rates compared to a fund with lower AUM.
- Cost: Your debt fund is managed by debt fund managers. It won’t be free. An expense is charged which is called an expense ratio. Market regulator SEBI has mandated an expense ratio ceiling of 2.25 percent of total assets.