Four Important Tips to Invest in Debt Funds

Financial Market in India offers different types of instruments to match the risk appetite of different investors. Products in the equity segment are labelled as high-risk entities that reap substantial returns while those in the debt segment are labelled low-risk investment vehicles that guarantee assured returns.

Debt instruments are popular for their assured return rates, which are somewhat lower than their equity counterparts. Since the returns are low, the risk associated with such investments is minimum. As a result they are considered as safe means of investments.

However, debt funds do not offer easy liquidity. So, mutual fund companies provide debt funds to overcome this shortcoming. Unlike debt vehicles, these funds are standardized and the investor does not require extensive financial knowledge to make the purchase decision.

Here are the four simple and easy tips to invest in debt funds:

1>    Plan the tenure

Debt funds invest predominantly in bonds and debentures. All these instruments offer substantial gain over a period of time. As a result, you should invest in debt funds for a long time in order to reap substantial capital appreciation. Furthermore, investment tenure should be more than a year in order to gain double digit returns.

2>    Compare the NAV values

NAV or Net Asset Value plays a crucial role while choosing the right debt fund. NAV value will not depend on the fluctuating market conditions in case of these instruments. However, the value gets affected with the cash flow of the fund. Funds with higher cash flow are often labelled stable as the NAV value does not fluctuate rapidly.

3>    Assess the Credit Quality

Credit rating is a vital parameter considered while purchasing a debt fund. Credit risk analyzing bodies like CRISIL determine the credit rating for all the debt schemes. Schemes that carry lower ratings often compensate their buyers with favorable returns. However, the one with higher ratings are considered the safest.

4>    Determine the Scheme's Portfolio

Debt funds do not necessarily invest in a single instrument. Fund managers choose different instruments in order to get balanced returns as well as to diversify credit risk. Understand the portfolio and determine the credit risk associated with every underlying instrument. This way you can get better insights on how the scheme will perform in the long run.