Home / Mutual Funds / News /  This is why you should never invest in ‘top 3' debt mutual funds
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 While choosing investments most often we research for the best performing funds, stocks etc, but Aditi Khandelwal, Certified Financial Planner & In-house Influencer at Jupiter, suggests otherwise when investing in debt funds. 

She pointed out, “Whenever you choose to invest debt funds, never select the top three funds but select fourth and fifth fund in the category."

Though the strategy of investing in best performing funds might work for equity mutual funds meant for long term goals (though there are other factors to consider), the same does not fit well for debt fund investments. 

Khandelwal explained, in order to earn higher returns, these funds have taken a higher risk than required by investing in low quality papers.

When investing in debt funds, the priority is not to earn high returns but to ensure safety, and may be a 1% to 2% more return as compared to FD or saving accounts. 

How to choose a debt fund? 

Look at the credit quality of papers: While selecting debt funds always look at the credit quality of the papers it has invested in, she said adding, such information are easily available in fact sheets that comes with the fund.  

Now, if the exposure is more than 90% in AAA or AA paper, then the fund is secured.  Meanwhile, if the AAA exposure is 40% or 50%, then you may take a step back and think about it.

So it is always better to pick debt fund from the middle of the category. 

 Fund should have at least 50 to 60 underlying debt papers: Overdiversification is a good thing in debt funds, said Chenthil Iyer, Sebi registered investment advisor and chief strategist at Horus Financial Consultants.

“There should be at least 50 to 60 underlying debt papers in a fund. This way the concentration risk is reduced. Also, you need to make sure that there are 25 to 30 unique recipients for the money and none of them should have more than 5 to 10% weightage."

Where should you invest as per your timeframe?

For three years or more, the investor should invest in banking PSU funds, corporate bond fund or dynamic bond fund, said Mahendra Jajoo, CIO, Fixed Income, Mirae Asset Management Company

Then for two to three years goal, he should look to investing in short-term funds. 

Then, for money kept for emergency use or the contingency fund should be kept in liquid funds or ultra short term funds



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