3 factors to consider before investing in debt funds

3 factors to consider before investing in debt funds


As mutual fund investments have increased in a promising manner, the Indian investors are looking forward to different types of MFs to invest in. Debt funds are a variant of mutual funds that can give the investors medium gains. In general, people with lesser risk appetite choose the debt funds to invest as the equities belonging to the less volatile market.

What is a debt fund?

If you are thinking of investing in a debt fund, it is vital for you to know what is a debt fund? All debt fund investments are made on securities like treasury bills, corporate bonds, and government securities. Apart from these, debt fund investments can be made in other money market instruments too. Debt fund investments are chosen by the investors as they can provide tax benefits, reasonable returns, and an opportunity for the investors to diversify the portfolio. All debt fund investors must consider certain factors to ensure maximum returns.

Factors to consider before investing in debt funds

The following factors are to be considered by all the investors who are willing to deposit money on debt funds:

  1. Duration and maturity

When it comes to debt funds, duration and maturity are a couple of primary considerations to make. Normally, the debt mutual funds can be affected by the investment movements in a sensible manner. The interest rate and the price of the bond have an inverse relationship. Due to this relation, the investor needs to be aware of the modified duration. The NAV of the debt fund will change as the rate of interest changes.

As an investor, if you find that the interest rates in the market have more chances of falling, try to invest in the debt funds that have longer tenure. Once you gain clarity on what is a debt fund, you can establish a better grip on estimating the ideal maturity amount for you.

  1. Expense Ratio

The expense ratio is the second most vital thing that you need to consider when deciding to invest in a debt fund. It refers to the cost of maintaining a debt fund. As an investor, you have to keep in mind that the upper value of the debt fund return will be limited. You must avoid taking a standard debt fund plan as the expenses might be more than the actual return.

Direct debt fund investment can be a more convenient option as you need not pay any fees to a fund pilot. Your investment capital must be more in case you have chosen a standard debt fund plan. One of the easiest ways to determine the actual return is to determine the percentage of return from a debt fund and the same for the expense ratio and subtracting both.

  1. A regime of Interest rate

Any changes in interest rates can affect the returns of the debt funds. If the interest rates depreciate, the value of the bonds already published will be more. In case it increases, the value of the previously issued bonds will be more than the newer ones.

You should always have a clear concept about the interest rates and the situations when it can either increase or decrease. For more information on what is a debt fund, you can visit https://scripbox.com/mf/what-is-debt-fund/

Apart from the three basic factors mentioned above, there are some more factors like credit risk, maturity yield, and market pressure. Every investor must consider concentrating on the condition of the market when it comes to investing in the debt fund. As it helps incur medium returns, the new investors can use it for building up the capital for further investments. If an investor thinks of making a direct debt fund investment, he must acquire the necessary knowledge and then, go for it.

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