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Business News/ Mutual Funds / Mutual Funds: How to choose the right debt funds? Here are 7 key factors to consider

Mutual Funds: How to choose the right debt funds? Here are 7 key factors to consider

Mutual funds are a preferred choice for new-age investors, but many find it challenging. Choosing the right debt fund can be complex as they invest in limited assets. To optimize gains, investors should consider factors like investment horizon, risk tolerance, and market dynamics.

Investing in debt funds requires understanding factors like risk tolerance, investment horizon, and market dynamics. Premium
Investing in debt funds requires understanding factors like risk tolerance, investment horizon, and market dynamics.

Mutual funds have emerged as a favourite option for new-age investors but, for many, the financial instrument still remains a tough nut to crack. For most people, how to choose the appropriate fund is the real pain point.

For the beginners, debt funds are a bit more complex to understand. Unlike equity funds where one can choose funds based on the nature of underlying assets. Choosing a debt fund on the basis of its assets is not always logical. 

Apparently, all debt fund investments are in a handful of assets such as corporate debt, government securities, and other money market instruments whose income or interest rate is capped. Then, what should be the strategy to gain maximum mileage out of a debt fund?

While aiming for optimising gains, an investor should keep in mind the factors that help maximise a debt fund’s returns. Here are some points to ponder with:

Goal is supreme

Primarily, the selection of a debt fund should be based on an investor’s future needs. Every investment carries its own risks and rewards. Investments in debt funds may be considered as a safer investment option offering moderate growth. So, before choosing one, the investor should assess whether the scheme is suitable for his/her financial goals. Watch whether your wealth is growing in tandem with the passage of time.

Also Read: US Federal Reserve signals interest rate cuts in 2024 second half: Should you invest in debt funds?

Watch the events

After investing in a debt fund, do not be passive investors. In an emerging economy, market dynamics will keep changing and economic factors fluctuate. Investors must be aware of current market trends, economic indicators and regulatory changes that might influence the performance of debt funds. Therefore, it is important to keep a tab on the economic events and market movements that will have an impact on one’s investments.

Risk appetite

Investors should evaluate their risk tolerance level. Debt funds offer a range of risk profiles from conservative to aggressive. Those who have a low-risk tolerance can go for funds that invest in investable grade bonds and other fixed-income securities such as government bonds, treasury bills and top-rated corporate bonds. Those who are having a high risk appetite may choose funds exposed to credit risk.

Also Read: Debt market: AMFI reports 1.98 lakh crore outflow in March 2024. What are debt funds? All FAQs answered

Investment horizon

Every investment needs sufficient time to grow. Investment horizon is a period during which an investment keeps growing. An investment can be short term -- having a period of three months to one year. It is useful for meeting short-term objectives. Then, there are medium term investments – from one year up to five years. 

Such investments are useful for meeting medium-term plans like buying a car or home or children’s education. Investments having a long-term horizon are of five years and more. This can be used for long-term goals like retirement planning or children’s marriage. Make sure that your investment horizon is aligned with your financial goals, and if there is any disruption like recession or financial turmoil, take corrective steps that will help you stay on course.

Duration dynamics

Duration dynamics is critical for a debt fund to generate returns. Usually, fund managers do the job of altering the allocation to long-term bonds or short-term bonds based on their calculation on the interest rate movements to take advantage of the situation. Now we are in a high interest rate regime, and rates are likely to fall in the short-to-medium term duration. Normally, long duration funds can reap the benefit when rates are falling. So, before taking any investment decision, be sure that in which direction the rates will go and how to make profit out of that.

Fund’s objectives

Your personal investment goals should align with the fund’s objectives. Every debt fund has a specific investment mandate and a strategy to meet investors’ goals. For an investor, it is important to understand the fund’s objectives and its portfolio composition. Some funds are focused on generating regular income through interest payments. Some are focused on capital appreciation. Be clear on your goals and make sure that the fund’s objectives are suitable for them.


Always look for a fund with a diversified portfolio. Diversification is a fundamental principle of prudent wealth management. The fund should allocate your money into a diversified portfolio of securities. It can help in reducing the credit risk and interest rate risks considerably and protects your money from portfolio concentration.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Marzban Irani, Chief Investment Officer – Fixed Income, LIC Mutual Fund


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Published: 17 Apr 2024, 08:52 AM IST
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