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  • Beyond Past Returns: Consider These 5 Factors When Selecting Debt Funds

    Published on April 25, 2024

    New Delhi  : When selecting debt mutual funds, it’s easy to be swayed by attractive past returns. However, past performance is not a reliable predictor of future success – especially for debt funds.

    Investors must consider a broader set of factors to make informed decisions. Here are five crucial aspects to evaluate when choosing debt mutual funds:

    Credit Quality of Holdings: The credit ratings of the securities in a debt fund’s portfolio are a key indicator of the fund’s risk level. 

    High-quality bonds (such as AAA-rated) generally offer lower yields but have lower default risks. 

    Conversely, high-yield bonds (lower credit rating) can offer higher returns but come with increased risk of default.

    It isn’t wrong to invest in a portfolio of high-yield bonds but ensure that you are doing so willingly after understanding all the risks.

    Interest Rate Sensitivity (Duration): Understanding a fund’s duration will help assess its sensitivity to changes in interest rates. 

    Funds with longer durations are more affected by interest rate fluctuations, leading to higher volatility in their net asset value (NAV).

    Yield to Maturity (YTM): This is a comprehensive measure that estimates the total return expected on a bond if it is held until maturity, factoring in interest payments and capital gains or losses. 

    YTM provides a fairly accurate picture of the fund’s potential return and is more relevant to you than past returns while assessing a debt fund.

    Sector Allocation: The distribution of assets across different sectors, such as government securities, corporate bonds, and municipal bonds, can impact the fund’s risk and return profile.

    It is important to understand the rules that debt funds are governed by when it comes to issuer allocation.

    Liquidity and Exit Load: Liquidity is crucial for debt funds, as it determines how easily you can buy or sell units without impacting the market price. 

    Also, consider the exit load, which is a fee charged for withdrawing from the fund within a specific period. 

    Funds with high exit loads can limit your flexibility and reduce your effective return if you need to access your funds prematurely.

    Where to research these quantitative factors of debt funds?

    On Dezerv’s website that’s optimised for mutual fund research!

    Dezerv, a wealth management company headquartered in Mumbai, has made information of 2000+ schemes available on its website for free.

    You can research mutual funds based on 100+ quantitative factors that Dezerv has made available on its mutual fund discovery and research platform.

    Visit the Dezerv website and retrieve information on any mutual fund scheme that you want to research about.

    Researching before investing in mutual funds is essential especially for DIY investors who don’t have professional guidance.


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