A Guide On Selecting The Appropriate Debt Mutual Funds

Every individual has a different investment goal and financial requirement. Nobody can compare them to others. There are different kinds of investments that banks and financial institutions offer to their customers which include fixed deposits, stocks, equities, mutual funds, etc. They can choose how many ever investments they like and the amount to invest in them. They should ensure it fulfils their financial goals and helps them earn higher investment returns.

Debt mutual funds give better returns than bank fixed deposits. They mostly invest in government securities, PSU bonds, bank certificates of deposit, commercial paper, and corporate debt paper. People believe that they offer stable returns but are not risk-free. Selecting the right fund for the portfolio is essential for every investor. They can also pay the fund house using net banking apps.

Following are some guidelines for investors interested in investing in them:

  1. Match the investment duration with the requirement: Unlike equities, these funds are not suitable for long investment periods. They have an investment tenure between one month to five years, where the investment horizon varies according to the term. Therefore, as a first step, decide the investment horizon and identify the relevant term. Funds with higher duration have more sensitivity towards interest rates. The modified course will help the investor assess the fund’s sensitivity to interest rates. The higher the limited time, the higher is the fund’s volatility. Long term funds have a higher modified period.
  2. Select the investment category carefully: After deciding on the duration, pick an investment category. There are 16 categories that SEBI has classified for debt funds. All of them have restrictions on certain conditions. Therefore, based on the investment objective and investment horizon, pick the right match for the investment portfolio.
  3. Avoid funds with high expense ratios: Investors can easily understand the risks associated with debt mutual funds. There are high returns with high stakes and expense ratio. Hence, those who want minimal risks should choose those categories which have lesser expense ratios.
  4. Opt for reputed fund houses and well-known fund categories: Big and reputed fund houses may have a greater reputation in the market. Debt funds opened with them have a lower concentration of risks. In a scenario when the fund portfolio is experiencing a default, the impact on the fund’s NAV is not going to be too high.
  5. Assess the returns and safety of investment: The level of risks in investment depends on the type of asset it is. To earn high returns, investors must take high risks as well. They must understand their risk capacity. It is healthy to take slight risks in investments. Liquid funds are the best option for holding cash in the savings bank account. These investments also have credit and interest rate risks which all investors must take.

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