What to look for in Debt Mutual Fund ?
Recently I met a potential client. He had been investing in Mutual Funds for past 10 years. Most of his investments were either in Equity or Equity oriented hybrid Mutual Funds. When I asked him why he had no allocation to debt mutual fund and why he only preferred Bank Fixed deposits for his Debt Investments, his reply astonished me. His reply was that he once invested in GSec Fund because past 1 year return was in double digits but after he invested he got heavy negative returns and he immediately booked losses and vowed never to invest in Debt Funds again.
Well, he is not the only one who thinks like this. Most investors I know are not aware how to invest in a Debt fund and what to look for in a Debt Mutual Fund. Most people simply look at past returns and invest basis that, forgetting that Investing based on past returns is like driving looking into the rear view mirror. It is sure to lead to accidents.
Here is a simple checklist which can help you navigate the ocean of Debt funds and choose the best according to your Financial Goal :
- Be clear about your time Horizon : Do you want to just park money which you may need within a year or you wish to invest for the long haul , say more than 3 years ? Choose your debt fund according to Time Horizon of your Investment and match the Debt Funds Average Maturity Profile with your Investment horizon. Closer the better. Once you match your Investment horizon with the Debt Fund’s Average Maturity profile, stay Invested for that Long a period. Treat it like you would treat your Bank Fixed Deposits and avoid looking at NAVs constantly.
- Credit Quality : We highly recommend ZERO Compromise on Credit quality. When you see Credit Rating agencies do a Lousy job and even AAA rated Corporates Defaulting, it makes sense to go for Ultra Safe GSec Funds, The Bharat Bond Series and the likes so that you do not get rude shocks.
- Yield To Maturity : Needless to say, if the above two criteria are met, choose the one offering Highest YTM ( Yield to maturity ).
- Total Expense Ratio : Assuming all other things being equal, A Debt fund offering 7% YTM with 1% Total Expense Ratio will yield lesser than a Debt Fund offering 6.5% YTM with a 0.2% Total Expense ratio. In any type of investment, the Expenses or lack if it, plays a major role in your Final Returns.