Many investors seem to link mutual funds with the equity market. However, there are mutual funds that also invest in the debt market too. And while equity mutual funds are well known for their high return generation potential, they’re also considerably riskier. This makes them more suitable for aggressive investors.
However, if you’re a more conservative investor with a low risk appetite, you may consider investing in debt mutual funds since they’re far less risky and provide a slightly higher rate of return compared to traditional investment options.
That said, it is important to pick the right debt funds if satisfying your goals on time is your priority. Continue reading to find out how you can do so.
Choosing the right debt mutual fund involves careful consideration of a few factors. Here’s a more in depth look at the things that you would need to keep in mind.
Just because debt mutual funds are less riskier than equity doesn’t mean that they’re completely free of risk. All debt funds tend to carry certain risks such as interest rate risk and credit risk.
Interest rate risk is the risk of a change in the interest rate impacting the return generating potential of the debt fund. Credit risk, on the other hand, is the risk of the default when it comes to interest or principal repayment.
So, before you go ahead and choose the debt mutual fund for yourself, make a thorough evaluation of the interest rate risk and credit risk of the fund.
When it comes to debt funds, there are multiple different types to choose from. For instance, there are short-term funds, ultra-short term funds, and long-term funds. For maximum success, the fund that you choose to invest in should always match with your goals. If your goal is long-term, such as the purchase of a house or your child’s education, it is advisable to invest in long-term debt funds. The same goes for short-term goals as well.
Since debt mutual funds are actively managed, every fund has a manager. The manager’s decisions have a direct impact on the performance of the debt fund. Therefore, before you invest in a debt fund, always make sure to go through the fund manager’s past performance with other funds. This way, you will be able to gauge the ability and the decision making skills of the manager.
And finally, all debt mutual funds charge a certain percentage of the fund’s total assets to cover various expenses involving administration, advertising, and more. This is known as the expense ratio. The lower the expense ratio, the better the returns are. So, that’s another thing that you would need to consider when choosing a debt fund.
That said, investing in a debt fund requires you to first possess a demat account. If you don’t have one already, simply get in touch with Motilal Oswal to open a demat account online within just a few minutes and in a completely paperless process.
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