Best debt investment options in India. All you need to know
Debt mutual funds make investments in fixed-income assets such as government securities, commercial paper, corporate bonds, and treasury bills, among others. Let’s examine the best debt investment options in India.
- What are debt mutual fund investments?
- Who should invest in the best debt mutual funds?
- Factors to consider for Investors
- How should best debt mutual funds be evaluated?
- Top 10 best debt mutual funds in India
What are debt mutual fund investments?
Debt mutual funds make investments in fixed interest-earning securities like certificates of deposits and treasury bills. A debt fund’s principal goal is to build wealth by earning interest income and steadily increasing the invested capital.
During the time that investors remain invested in the fund, the underlying assets produce a fixed rate of interest.
A debt fund’s fund manager makes investments in assets depending on those assets’ credit ratings. When debt security seems to have a better credit rating, it has a better possibility of making regular interest payments as well as principal repayments when the investment term expires.
Additionally, the fund manager adjusts his investing strategy per the general changes in interest rates.
Who should invest in the best debt mutual funds?
Investors who are risk averse and not ready for equity exposure might choose debt funds. Debt funds generate wealth for investors with little to no risk. These funds are also focused on steady revenue.
Debt funds are often held by investors for a short- to medium-term time horizon. Your investing horizon should be taken into consideration when selecting a debt fund.
For a short-term investor who often keeps their excess cash in a savings account, liquid funds might be a good option. Much like savings bank accounts, liquid funds allow withdrawals at any time and offer bigger returns in the amount of 7% to 9%.
Dynamic bond funds can be the best choice if you ever need to ride the volatility of interest rates. With a medium-term investment horizon, these funds can provide more returns than a 5-year bank FD.
Factors to consider for Investors
1. Fund goals
Debt funds diversify their portfolio of different securities to maximize returns. They will behave predictably. Debt funds are available to conservative investors for this reason.
2. Fund Category
Further subcategories of debt funds include monthly income plans (MIPs), liquid funds, dynamic bond funds, fixed maturity plans (FMPs), GILT funds, income funds, credit opportunities funds, short-term funds, and ultra-short-term funds.
Interest rate risk, credit risk, and liquidity risk are all factors that might affect debt funds. The movement in overall interest rates may cause changes in the fund’s value. The issuer could miss a payment deadline for interest and principal. When there is no demand for the fund management to liquidate the underlying security, liquidity risk is there.
To manage your investment, debt funds carry an expense ratio. No fund house may charge more than what the Securities and Exchange Board of India (SEBI) has determined as the maximum.
5. Investment Horizon
For liquid funds, 3 months to a year investment horizon is suitable. You may want to look into short-term bond funds if you have a longer time horizon, like two to three years.
6. Financial Objectives
Debt financing can be utilized for several purposes, including generating extra income or enhancing liquidity.
Additional read: How does rating impact debt funds?
How should best debt mutual funds be evaluated?
1. Fund returns
Over the long term, such as three, five, or ten years, you need to search for stable returns. Select mutual funds that consistently outperformed benchmark and rival funds throughout a range of periods. To get results, keep in mind to evaluate the fund performance that corresponds to your investment horizon.
2. Funds history
Select investment fund companies with a proven track record of reliable performance. Make sure they have a minimum of a five to the ten-year history of reliability.
3. Expense ratio
It displays the percentage of your money that is used to manage the fund. A larger take-home return results from a reduced spending ratio. Select a fund with a lower expense ratio that has the potential to perform better.
4. Financial ratios
To analyze a fund, you can utilize financial ratios such as the standard deviation, Sharpe ratio, alpha, and beta. Compared to a fund with lower beta and standard deviation, a greater beta and standard deviation fund are riskier.
To find investments that offer larger returns for each additional unit of risk taken, search for funds that have a higher Sharpe ratio.
Top 10 best debt mutual funds in India
You must examine a fund from several angles before choosing it. The best debt funds can be found using a variety of quantitative and qualitative criteria depending on your needs.
Your financial objectives, level of risk tolerance, and investment horizon should also be considered.
Investing in debt funds can frequently become challenging. Before starting it’s always good to understand the financial risks and benefits involved in any investment.