How To Select The Right Debt Fund?
Investment instruments are subjective to individual investments goals, and hence, there is no fixed instrument that might meet everyone’s needs. A debt fund can be proven right or wrong for you depending upon how well it meets your investment objectives, while also taking care of your risk appetite.
Here’s how you can assess if a debt fund is suitable for you or not:
- Investment Horizon: It refers to the time period for which you wish to stay invested in a debt fund, it could be as short as a day and as long as 10-20 years. Overnight funds feature the shortest average maturity, i.e. of 1 business day. On the other hand, debt funds holding securities with long average maturity periods include long duration funds and gilt funds.
- Risk Appetite: While all debt schemes feature interest rate risk, credit risk, and inflation risk, the degree of risk varies from fund to fund. Liquid funds and overnight funds carry the least amount of interest rate risk, a gilt fund features the least amount of credit risk. Read more about the risks associated with debt funds.
- Interest Rate Trend: During an upward trend in interest rates, it is wiser to invest in short duration funds rather than long duration funds. This is because with increasing interest rates, the modified duration of long duration debt funds will be higher. Similarly, longer duration debt funds are favourable in times of declining interest rates.
A debt fund is a type of mutual fund which invests a majority of its assets in fixed-income securities such as corporate bonds, sovereign securities, certificates of deposit (CDs), commercial papers and various other debt and money market instruments.
As per SEBI (Securities and Exchange Board of India), the capital money market regulator, there are as many as 16 types of debt funds such as overnight fund, liquid fund, medium duration fund, long duration fund, etc. Thus, it is imperative to learn about the types of debt funds and then select the debt fund which best suits your investment requirements.
However, before proceeding with the parameters on which you should evaluate a debt fund, let’s get familiar with certain terms associated with debt schemes.
- Average Maturity:
A debt fund invests in a number of debt and money market securities; each security in the portfolio may have a different maturity date. The maturity date of a debt instrument refers to the specific date in the future, when an investor will be repaid his/her principal investment amount by the issuer of the debt instrument.
The average maturity of a debt scheme is the weighted average of the maturity periods of all the debt instruments held by the issuer it in its portfolio. Average maturity can be calculated in days, months or years. For instance, the average maturity of a debt fund is 7 years; this implies that on an average, all the securities held by the fund will mature in 7 years.
However, the maturity period of individual securities may be more or less than 7 years. Generally, the longer the average maturity of a debt fund, the higher is the risk associated with it.
- Yield To Maturity (YTM):
The yield earned on a bond is different from its coupon rate. While the coupon rate refers to the fixed interest rate that an investor will receive on his/her debt investment, yield refers to the fixed interest rate earned in relation to its purchase price.
For example, let’s take the face value of a bond to be Rs. 1,000 and its coupon rate at 10%. Then, the fixed interest amount is 10% of Rs. 1,000 i.e. Rs. 100. Now, suppose the price of the bond has decreased to Rs. 980, then the current yield from the bond is Rs. 100 divided by Rs. 980, i.e. 10.20%. Similarly, if the bond price increases to say, Rs. 1,100, the bond yield will decrease to 100/1100 i.e. 9.09%.
Yield To Maturity (YTM) of a debt fund refers to the rate of return that an investor can expect if he/she remains invested in the fund until its maturity. The YTM of a debt fund may change from time to time as a result of changing market and economic conditions.
- Modified Duration:
Modified duration of a debt fund indicates the sensitivity of its value to the changes in interest rate. There exists an inverse relationship between bond prices and interest rates. Thus, the bond prices decrease in response to an upward movement in interest rates and increase when interest rates decrease.
For instance, if the modified duration of a debt fund is 2 years, then a 1% increase in interest rates will result in a 2% decrease in the value of the fund. The higher the modified duration of a debt fund, the higher its sensitivity to market interest rates.
Here is a List of Debt Funds to Invest in FY 2020:
| Fund Name | Category | AUM (Cr) | 1-Year | 3-Year | 5-Year |
| SBI Magnum Medium Duration Fund | Medium Duration Fund | 1,671.35 | 12% | 9% | 10% |
| PGIM India Dynamic Bond Fund – Direct Growth | Dynamic Bond Fund | 41.37 | 14% | 9% | 11% |
| Franklin India Dynamic Accrual Fund | Medium Duration Fund | 3,910.34 | 10% | 9% | 10% |
| LIC MF Banking & PSU Debt – Direct Growth | Banking and PSU Fund | 861 | 12% | 8% | 8% |
| DSP Govt Sec Fund – Direct Growth | Gilt Fund | 592.94 | 17% | 8% | 10% |
| ICICI Prudential All Seasons Bond Fund | Dynamic Bond Fund | 2,707.37 | 11% | 8% | 10% |
| PGIM India Dynamic Bond Fund Regular Growth | Dynamic Bond Fund | 41.37 | 13% | 8% | 9% |
| Canara Robeco Short Duration Fund – Direct Growth | Short Duration Fund | 374.2 | 10% | 8% | 8% |
| Kotak Credit Risk Fund – Direct Growth | Credit Risk Fund | 4,735.49 | 10% | 8% | 9% |
| Aditya Birla Sun Life Floating Rate Fund – Direct Growth | Floater Fund | 5,986.40 | 9% | 8% | 9% |
| Edelweiss Banking and PSU Debt Fund – Regular Growth | Banking and PSU Fund | 103.18 | 13% | 8% | 8% |
| JM Dynamic Debt Fund – (Direct) | Dynamic Bond Fund | 285.78 | 7% | 8% | 8% |
| IDFC Bond Fund – Medium Term Growth – Direct Growth | Medium Duration Fund | 2,884.74 | 12% | 8% | 9% |
| IDFC Bond Fund – Short Term – Direct Growth | Short Duration Fund | 9,643.13 | 11% | 8% | 9% |
| Invesco India Treasury Advantage Fund – Direct Growth | Low Duration Fund | 1,088.36 | 10% | 8% | 8% |
| IDFC Low Duration Fund – Direct Growth | Low Duration Fund | 4,587.01 | 9% | 8% | 8% |
| L&T Short Term Bond Fund – Direct Growth | Short Duration Fund | 4,192.24 | 10% | 8% | 8% |
| Reliance Income Fund – Direct Growth | Medium to Long Duration Fund | 256.21 | 15% | 8% | 10% |
| Aditya Birla Sun Life Floating Rate Fund – Regular Growth | Floater Fund | 5,986.40 | 9% | 8% | 8% |
| L&T Ultra Short Term Fund – Direct Growth | Ultra Short Duration Fund | 2,625.76 | 9% | 8% | 8% |
| LIC MF Banking & PSU Debt Regular Growth | Banking and PSU Fund | 861 | 11% | 8% | 7% |
| Edelweiss Government Securities Fund – Regular Growth | Gilt Fund | 80.06 | 15% | 8% | 10% |
| Reliance Money Market – Direct Growth | Money Market Fund | 3,073.52 | 9% | 8% | 8% |
| Axis Strategic Bond Fund | Medium Duration Fund | 1,242.95 | 8% | 8% | 10% |
| DSP Banking & PSU Debt Fund – Direct Growth | Banking and PSU Fund | 2,096.96 | 11% | 8% | 9% |
| IDFC Low Duration Fund – Regular Growth | Low Duration Fund | 4,587.01 | 9% | 8% | 8% |
| Reliance Money Market Regular Growth | Money Market Fund | 3,073.52 | 9% | 8% | 8% |
| DSP Govt Sec Fund – Regular Growth | Gilt Fund | 592.94 | 16% | 7% | 10% |
| IDFC Corporate Bond Fund – Direct Growth | Corporate Bond Fund | 17,022.37 | 10% | 7% | – |
| Invesco India Treasury Advantage Fund Regular Growth | Low Duration Fund | 1,088.36 | 9% | 7% | 8% |
| Quantum Dynamic Bond Fund Regular Growth | Dynamic Bond Fund | 59.7 | 11% | 7% | – |
| L&T Ultra Short Term Fund – Regular Growth | Ultra Short Duration Fund | 2,625.76 | 8% | 7% | 8% |
| JM Dynamic Debt Fund Regular Growth | Dynamic Bond Fund | 285.78 | 7% | 7% | 8% |
| IDFC Bond Fund – Short Term – Regular Growth | Short Duration Fund | 9,643.13 | 11% | 7% | 8% |
| L&T Gilt – Direct Growth | Gilt Fund | 129.03 | 13% | 7% | 10% |
| L&T Short Term Bond Fund Regular Growth | Short Duration Fund | 4,192.24 | 10% | 7% | 8% |
| Canara Robeco Short Duration Fund – Regular Growth | Short Duration Fund | 374.2 | 9% | 7% | 7% |
| IDFC Bond Fund – Medium Term Growth – Regular Growth | Medium Duration Fund | 2,884.74 | 11% | 7% | 8% |
| IDFC Corporate Bond Fund – Regular Growth | Corporate Bond Fund | 17,022.37 | 10% | 7% | – |
| Invesco India Liquid Fund – Direct Growth | Liquid Fund | 6,535.17 | 7% | 7% | 8% |
| Kotak Credit Risk Fund | Credit Risk Fund | 4,735.49 | 9% | 7% | 8% |
| Invesco India Liquid Fund Regular Growth | Liquid Fund | 6,535.17 | 7% | 7% | 8% |
| IDFC Cash Fund – Direct Growth | Liquid Fund | 12,065.28 | 7% | 7% | 8% |
| L&T Triple Ace Bond Fund – Direct Growth | Corporate Bond Fund | 1,476.13 | 15% | 7% | 9% |
| IDFC Cash Fund – Regular Growth | Liquid Fund | 12,065.28 | 7% | 7% | 7% |
| Reliance Income Fund – Regular Growth | Medium to Long Duration Fund | 256.21 | 15% | 7% | 9% |
| Reliance Dynamic Bond Fund – Direct Growth | Dynamic Bond Fund | 967.47 | 12% | 7% | 9% |
| IIFL Liquid Fund – Direct Growth | Liquid Fund | 646.9 | 6% | 7% | 7% |
| L&T Triple Ace Bond Fund Regular Growth | Corporate Bond Fund | 1,476.13 | 14% | 6% | 8% |
| IIFL Liquid Fund – Regular Growth | Liquid Fund | 646.9 | 6% | 6% | 7% |
| Reliance Dynamic Bond Fund Regular Growth | Dynamic Bond Fund | 967.47 | 11% | 6% | 8% |
| IDFC Credit Risk Fund – Direct Growth | Credit Risk Fund | 1,299.82 | 10% | – | – |
| IDFC Credit Risk Fund – Regular Growth | Credit Risk Fund | 1,299.82 | 9% | – | – |
| Quantum Dynamic Bond Fund – Direct Growth | Dynamic Bond Fund | 59.7 | 11% | – | – |
1 Comment Comments
Thank you for the terrific article