Mutual funds have maintained their popularity among retail investors, as seen by the continuous inflows into SIPs in recent years. Mutual funds are available to investors, and they may be divided into five primary categories: equity funds, debt funds, hybrid funds, solution-oriented schemes, as well as other funds. Equity funds are the most common type of mutual fund, followed by debt funds and hybrid funds. The risk profile, investment horizon, financial aspirations, and other characteristics of individual investors tend to vary depending on the sort of mutual fund scheme chosen. This article will focus on assisting investors in checking the portfolio quality and selecting the appropriate debt funds for their portfolios.
1. Credit risk
Perhaps you’ve heard of individual credit scores, such as the CIBIL score, which are calculated based on how successfully you’ve managed to fulfill your financial commitments in the past, such as loans, to provide you with a score. Company ratings are available in a similar fashion to that of individuals. These organizations are referred to as credit rating agencies. Companies such as CRISIL and ICRA are two instances of this type of organization. Companies’ financial statements and prior performance are examined by these organizations in order to determine their debt repayment capacity.
Here’s how you check and pick the best debt funds for your investment.
This is followed by the assignment of a rating to represent the capacity. The highest grade, AAA, signifies that it is almost probable that the firm will return its debt and, as a result, that the company has minimal credit risk. A further level of confidence is represented by the letter A, which signifies a little larger credit risk and so on. This goes all the way up to D, which is issued when a firm has not paid back its loan or appears to be unable to pay back its debt. The most effective strategy to mitigate this risk is to make an investment in a debt fund that loans to highly rated corporate borrowers.
2. Expense ratio
Prior to making an investment in a debt fund, it is critical to consider the expense ratio. The investor will not receive the complete amount if a debt fund generates a 10 percent return since the AMC (Asset Management Company) deducts expenses such as running fees and other administrative costs from the fund’s profits. Prior to investing in debt funds in India, investors should consider the cost ratio of the mutual fund that they are considering. Choose a fund with a low expense ratio in order to maximize your investment returns.
3. Assets Under Management (AUM) and Average Maturity
When investing in equity funds, the amount of money in the fund (the AUM) may or may not have a significant effect. However, in the case of liquid funds and ultra-short-term funds, the amount of money invested is critical. Fund managers that manage funds with more assets under management (AUM) would have more flexibility to purchase somewhat longer-term debt securities, which would result in modestly higher returns. The Average Maturity of such a fund serves as a representation of the portfolio maturity. The fact that the fund is hanging on to longer-term debt documents as compared to those other debt funds is referred to as a higher average maturity.
4. Current Yield or Portfolio Yield
Generally speaking, the yield is a metric of the interest income provided by the bonds in a portfolio of securities. An increase in the total portfolio yield would be achieved by funds invested in debt or bonds with a higher coupon rate (also known as a yield). The yield to maturity (YTM) of such a mutual debt fund is a measure of the fund’s current yield. Whenever comparing debt money in terms of yield to maturity (YTM), it is important to consider how the additional yield is being created as well. Is this at the expense of the worse overall quality of the portfolio? Investing in low-quality instruments brings with it its own set of problems. A debt fund that contains bonds or assets that may default in the future is something you don’t want to wind up investing in. As a result, constantly consider the yield on the portfolio while keeping the credit quality in mind.
Conclusion
We hope that this article helps you in finding and analyzing the best debt funds for your investment. Once you have appropriate knowledge you will know how to invest for a successful financial future.