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Debt Mutual Funds

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Debt Mutual Fund Risks

Degree of Risk

Many investors have the wrong perception that debt funds are absolutely safe .. Like bank fixed deposits.

This is absolutely wrong.. and it is wrong to compare with bank fixed deposits too.

Debt mutual funds are investments .. and all types of investments carry risks.

On the other hand, bank fixed deposits are savings deposit instruments and carry a bank guarantee for your deposit.

Perhaps, the volatility and degree of risk in debt funds will be far less compared to equity mutual funds.

Further, it is important to note that all debt funds are not the same.

A liquid or an ultra-short term, since have their assets invested in low duration security instruments, are safer compared to other debt fund types.

Of course, their returns too are limited .. mostly at around 9% in the present market circumstances.

Duration of investment

To have managed (if not reduced) risk, it is better to invest in an appropriate duration debt fund.

For instance, if you wish to invest for 3 months, an ultra-short would be better than a long-term debt fund.

Similarly, for an investment horizon of 1 year, a short-term debt fund would be better.

Direction of interest rate

Debt mutual funds closely are related to interest rates.

This is more true in the case of long-term debt funds.

In general, rising interest rates are not good news for debt funds.

On the other hand, falling interest rates are sweet news for debt funds.

Why is this so?

This is because of the inverse relationship between yields and prices of bonds.

When interest rates fall, the bond prices go up and it will boost NAVs of the debt mutual fund schemes.

Credit quality

Another important factor to consider is the quality of the underlying debt securities.

In general, go for high quality debt instruments because the risk of a default or delayed payment will be less.

The recent Taurus Mutal Fund issue highlights the need for going for good credit quality debt schemes.

Debt fund for 6 to 8 month investing

Question: Is there any exit load on ultra short term debt funds and liquid funds? Which one is better for 6-8 months duration?

Most Liquid funds do not have an exit load while Ultra Short term funds will have a 60-day load.

Since you investment horizon is for 6 to 8 months, and if you are prepared to take some debt fund risks, you could try short term funds that do not have any exit load or those that have smaller exit load.

For instance, BOI AXA Short Term Income Fund is a good fund in this category and has a 180-day load.

Franklin India Low Duration Fund has a load for 90-days

Reliance Floating Rate Fund - Short Term Plan is another plan worth trying. It carries a load for 30-days.

If, however, you wish to invest in Liquid funds only, study Indiabulls Liquid Fund, JM High Liquidity Fund and Reliance Liquid Fund - Cash Plan

Some good funds in the Ultra-Short term pack are Baroda Pioneer Treasury Advantage Fund, Birla Sun Life Cash Manager and BOI AXA Treasury Advantage Fund.

Invest on your own from the AMC website under DIRECT plan - GROWTH option.

  • Date: Feb 21, 2017

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