Top tips to consider while selecting debt funds for your investment goals

‘Debt can be a good thing if it is in the form of an investable asset’. 

Suppose you are an investor with a low tolerance for market risks and seek high liquidity from the investment asset, debt instruments can be a suitable option. Debt assets includes commercial papers, non-convertible debentures, government securities, treasury bills, corporate bonds, etc.

We are today in a situation where while the growth outlook for India kind of looks optimistic, major economies like United States and Europe are struggling to contain threats to economic growth. Geo-political instability largely due to Russia-Ukraine war and to some extent in China in past year has caused high inflationary pressures. The high inflation scenario seems likely to continue going forward, pushing central banks in US and other countries to continue raising interest rates for some more time before pausing in late 2023.

In the wake of global recessionary headwinds, volatility in the equity markets has raised concerns among various investors concerning their investment holdings. While one can stay invested in equities from a long-term perspective, diversifying assets into debt funds can help balance risks from equities, if any. 

Mutual funds offer debt funds, making it easier for investors to include these assets in their investment basket.

However, as investors, you also must ensure that you pick out the correct type of debt securities essentially based on your underlying financial objective and risk appetite.

Following the three parameters listed below can help you avoid pitfalls, if any, with respect to investments in debt securities.

Examine the yield-to-maturity of debt funds: This refers to yield generated from the debt security at the time of its maturity.  The returns are however subject to change if there are any variations in expenses, interest rate trend, among others. Each of the debt instruments has a maturity date which needs to be analysed to determine the corresponding risks and potential returns. 

Check the credit rating of securities: Credit risk is a risk of default on the interest and principle paid by the issuer. A credit rating measures a debt issuer's ability to repay the investor. Higher the credit rating of the debt instrument lower is the chances of credit default. These ratings are provided by credit rating agencies. 

Track interest rate trends: Debt securities generally deliver a fixed interest to their investor. This is known as the coupon rate. If the market interest rate is rising, the coupon rate of the debt asset will be lower than the market interest rate. Similarly,  a falling interest rate scenario would make the debt securities attractive as their coupon value will be more than the market interest rates.

If you are uncertain about your investments, it advisable to consult a financial expert to calculate your risk appetite and select the most suitable investment option to meet your financial goals. 

 

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Source: Kotak Mahindra Asset Management Company Limited internal research

The document includes statements/opinions which contain words or phrases such as "will", "believe", "expect" and similar expressions or variations of such expressions, that are forward looking statements. Actual results may differ materially from those suggested by the forward looking statements due to risk or  uncertainties associated with the statements mentioned with respect to but not limited to exposure to market risks, general economic and political conditions in India and other countries globally, which may have an impact on investments, the monetary and  interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.