What to check when buying debt mutual funds


Debt Mutual Funds are investments in fixed income securities and other debt securities. The returns of such a fund consists of interest income and capital appreciation.

As a beginner, you should know that debt mutual funds buy bonds similar to an equity mutual fund buying stocks. The borrower agrees upon a contract to pay interest at pre-determined intervals. In this case, the person lending the money is the fund manager.

Some of the best mutual funds in India can be a valuable asset if you choose it appropriately. Some things you should be giving a thought before buying a debt mutual fund are:

Investment Time Period

If you want to invest for a very short time like less than 1 year, then you should choose money market mutual funds. They invest in treasury bills, etc. with maturity in the range of 3 to 12 months.

check when buying debt mutual funds

If the investment period is lesser than 90 days, you can opt for liquid funds.

When the investment time period is anywhere between 3 to 12 months you can choose ultra-short-term debt funds. These funds change rapidly but provide guaranteed and higher returns.

When the investment time is about a couple of years, go for short-term debt funds.

If the investment tenure is more than 2 years, you can make investments in income funds and corporate bond funds which are two different categories of debt funds. The income funds involve investments in government bonds with different maturity rates whereas corporate bond funds invest only in corporate bonds.

If you are investing for more than 3 years, then you can think about fixed maturity plans which are closed ended debt mutual funds. Their maturity period is set, and one cannot do anything before the maturity period is over. Here the risk of interest rate is comparatively low.

Interest rates: Some of the best mutual funds in India follow this pattern. If interest rates go up, it is wiser to switch to short term funds. On the other hand, if rates dip low, it is sensible to invest in long duration debt funds.

Understand the market: Market factors to be considered when choosing a debt mutual fund are –

how will the behaviour of the interest rates be?

how the rates will be in the near future

As these things are not within the grasp of ordinary people, take help of a distributor or get updated on relevant information on a regular basis.

Present asset allocation: It is significant to know your entire assets, their allocation, the proportion of equity with respect to debt in the portfolio. You need to maintain a healthy balance in the proportion. This gives you stability and the chances of a good growth, in the time to come.

A fund suitable to you: After evaluating all the above-mentioned factors, discuss with your distributor and choose the available best mutual funds in India, so that you can reap its benefits.

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