Debt fund enhances the overall value of the portfolio, if chosen properly. Debt funds offer variety of products that are based on different time horizon to meet individual investment needs.
Selecting a debt fund is a tougher task then selecting an equity scheme. Below given are some of the important points that are to be kept in mind before making the selection.
Investment time horizon
Investors should first be aware of their future cash flow requirement before making the fund selection. Investors should define the period for which they want to invest.
- Short maturity funds include Liquid, Ultra short term & short term funds.
- Medium maturity funds include corporate bond and credit opportunities fund.
- Long maturity funds consist of Income, Gilt & dynamic bond funds.
Yield to Maturity (YTM) is the expected yield that the portfolio will generate from the coupon payments if the securities are held till maturity.
Average Maturity is the weighted average maturity of all the securities held in the portfolio. Higher the average maturity, more sensitive is the portfolio to the interest rate movement.
Modified Duration is a measure of sensitivity of the price of a bond to change in interest rates. If modified duration of the portfolio is 3 years and interest rates goes down by 1%, then Net Asset Value (NAV) of the fund will go up by 3 per cent. Higher the modified duration, higher will be the sensitivity of the price for a given change in interest rate.
Allocation to Credit rating
Credit rating indicates the credit risk that the fund assumes. Debt funds tend to invest in securities having varied credit ratings. Portfolio consisting of sovereign & higher rated papers implies lower default risk. Higher the credit rating of the securities in the portfolio, safer will be the investments.
Allocation to different asset classes
Debt funds invests in the various instruments like government bonds, state government bonds, corporate bonds, PSU bonds, treasury bills, cash etc. issued by different entities.
Government bonds are more sensitive to movement in interest rates compared to corporate & PSU bonds. Cash and current asset in the portfolio ensures availability of funds to meet day to day redemptions from the fund.
Market Scenario
See to it where the interest rates are expected to move in the overall economy – upwards or downwards for near term as well as few years down the line.
When interest rate cycle is in an uptrend, it makes sense to invest in short term debt funds, while in a falling interest rate scenario invest in longer duration debt funds.
Other than above, one should also look at the investment objective of the scheme, performance track record over a period of time vis-a vis its benchmark & other fund features like corpus and exit load.
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