What are the things that one needs to keep in mind when choosing the right debt funds?

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:

  1. Short term funds
  2. Medium to long term funds
  3. Fixed maturity funds

There are a few things one must remember while choosing Debt Funds.

  • Interest Rate Risk vs. Credit Risk
    If you are someone who is planning to stay invested for 6 months to 2 years, Debt Funds can be a suitable investment option for you.
    What is the 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 bond prices.
    What is credit risk?
    When fund managers invest about 40-50% in AA rated or lower rated investment instruments that are 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.
  • 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.
  • Quality of securities
    Review the portfolio allocation of the fund. Avoid schemes that invest in low credit. Investing in a fund that has high exposure to government securities is also not a good idea.
    Now that you know the intricacies of debt funds you may start investing by clicking on this link: https://www.hdfcsec.com/mutual-fund-investment-online

There are currently 16 different categories of debt funds available. The regulator has segregated the schemes based on the modified duration of the underlying portfolio, while certain categories like Credit Risk Funds and Corporate Bond Funds are defined as per the credit quality of the underlying portfolio. Mutual funds are expected to generate the best risk-reward based on the scheme’s investment mandate, and in ultimate good faith of the investor.