Debt Mutual Funds invest heavily in Money Market instruments. Government Securities, Bonds, and Treasury Bills are some instruments you can choose to invest in. Furthermore, the Securities and Exchange Board of India has categorized 16 Debt Funds based on their investment maturity. You can select from any investment tool that suits your investment goals and risk appetite.
Whether investing in Securities or Bonds, some considerations need to be taken:
Returns
Returns from a Debt Mutual Fund depend on the interest rates. The interest rate is likely to vary for every investment vehicle. Your investment timing also plays a role here. For example, if the interest rate is declining, investing in Pre-issued Bonds is a better option. The interest rates applicable would be higher. If the prevailing interest rate is increasing, it’s better to invest in Newly Issued Bonds, as the value of these Bonds will be higher.
Risk association
“Mutual Funds are subject to market risk.” A common statement we hear at the end of every commercial promoting Mutual Funds. Debt Funds are a safer investment option than Equity Investments. However, caution should be observed when making an investment. Debt Funds are vulnerable to two types of risk: interest rates and credit risk. The interest rate is subject to change. You should check on your investment to stay updated.
Credit risk is the risk of the debt issuer repaying the principal or interest return. Debt Funds marked as ‘AAA’ involve the lowest credit risk. Funds marked as ‘C’ involve a higher degree of risk. Always opt for a Credit Risk Fund that has as good credibility. You do not want to lose your lifelong savings over a gamble.
Investment Tenure
Every Debt Mutual Fund works on the maturity date. The investment vehicle earns you reasonable returns until its maturity. The maturity date varies for every investment vehicle. You can choose to invest in Debt Funds like Overnight Fund that matures within a day, or you could opt for a Long-Duration Fund that does not mature until seven years. Your decision entirely depends on the investment objective.
Expense Ratio
This is a ratio that indicates your investment cost. The expense ratio matters as you pay it upfront. Debt Funds returns are lesser than Equities. Hence, the lower the expense ratio, the better it is. For example, if your Debt Mutual Fund Investment has the potential to earn returns at 8%, then your expense ratio should be around 1.2-1.5%.
This leaves behind 6.5% of genuine returns after expense deduction. It also provides a chance to earn something from your investment.
