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Parameters To Pick The Best Debt Fund

Average Maturity/Duration

Interest Rate Scenario

Current Yield Or Portfolio Yield

Credit Quality Of Portfolio

Assets Under Management (AUM)

Expense Ratio

Best Debt Funds To Invest In 2020

Top 6 Tips to Choose Best Debt Mutual Funds to

Invest
Updated on September 17, 2020 , 1611 views

A mutual fund can bring overall value to your portfolio, if chosen properly. When it comes to debt
funds, these are the funds most preferred by investors who have an average risk appetite and those
who want to earn optimal returns in a short duration. These funds mainly invest in xed income
instruments like Government securities, Treasury bills, Corporate Bonds , etc. As debt funds invest in
government securities these are less risky compared to equities . Investors planning to invest in the
Best Debt Funds should evaluate certain important aspects that helps in determining the ability of
that particular fund and its performance. Let's check these parameters.

Parameters to Pick the Best Debt Fund

In order to select the best debt funds you wish to invest in, it is necessary to consider some of the
important parameters
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such as average
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maturity, credit forAUM,
quality, Article Let's
expense ratio, etc.Article have an
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Average Maturity/Duration

Average maturity is an essential parameter in debt funds that is sometimes overlooked by investors,
who tend to invest for a long period without considering the risks involved. Investors need to decide
their Debt fund investment based on its maturity period, Matching the time period of investment with
the maturity period of the debt fund is a good way to ensure you don't end up taking unnecessary
risk. Thus, it is advisable to know the average maturity of a debt fund, before Investing , in order to
aim for optimum risk returns in debt funds. Looking at the average maturity (duration is a similar
factor) is important, for example, a liquid fund may have an average maturity of a couple of days to
maybe a month, this would mean it is a great option for an investor who is looking to invest money
for a couple of days. Similarly, if you are looking at the time frame of one-year Investment plan then,
a short-term debt fund can be ideal.

Interest Rate Scenario

Understanding the market environment is very important in debt funds which are affected by interest
rates and its uctuations. When the interest rate rises in the economy, the bond price falls and vice-
versa. Also, during the time when the interest rates rise, new bonds are issued in the market with a
higher yield than the older bonds, making those older bonds of lower value. Therefore, investors are
more attracted towards newer bonds in the market and also a re-pricing of older bonds takes place.
In case a debt fund is having an exposure to such "older bonds" then when the interest rates rise, the
NAV of the debt fund would be impacted negatively. Furthermore, as debt funds are exposed to
interest rate uctuations, it disturbs the prices of the underlying bonds in the fund portfolio. For
instance, long-term debt funds are at a higher risk during times of rising interest rates. During this
time making a short-term investment plan will lower your interest rate risks.

If one has good knowledge of interest rates and can monitor the same, one can even take advantage
of this. In a falling interest rate market, long-term debt funds would be a good choice. However,
during the times of rising interest rates then it would be wise to be in funds with shorter average
maturities like short-term funds, ultra short term funds or even Liquid Funds .
Current Yield or Portfolio Yield
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The yield is a measure of the interest income generated by the bonds in the portfolio. Funds that
invest in debt or bonds that have a higher coupon rate (or yield) would have a higher overall portfolio
yield. The yield to maturity ( ytm ) of a debt mutual fund indicates the running yield of the fund. When
comparing debt funds on the basis of YTM, one should also look at that fact that how is the extra
yield being generated. Is this at the cost of as lower portfolio quality? Investing in not so good quality
instruments has its own issues. You don't want to end up investing in a debt fund which has such
bonds or securities that may default later on. So, always look at the portfolio yield and balance it off
with the credit quality.

Credit Quality of Portfolio

In order to invest in best debt funds, checking the credit quality of the bonds and debt securities is an
essential parameter. Bonds are assigned a credit rating by various agencies based on their ability to
pay the money back. A bond with AAA rating is considered to be the best credit rating and also
implies a safe and secure investment. If one truly wants safety and considers this as the paramount
parameter in selecting the best debt fund, then getting into a fund with very high-quality debt
instruments (AAA or AA+) may be the desired option.

Assets Under Management (AUM)

This is the foremost parameter to consider while choosing the best debt funds. AUM is the total
amount invested in a particular scheme by all investors. Since, most Mutual Funds ’ total AUM is
invested in debt funds, investors need to select scheme assets that have a considerable AUM. Being
in a fund which has a large exposure to corporates may be risky, since their withdrawals may be large
which may affect the overall fund performance.

Expense Ratio

An important factor to be considered in debt funds is its expense ratio. A higher expense ratio
creates a larger impact on the funds’ performance. For example, liquid funds have the lowest
expense ratios which are up to 50 bps (BPS is a unit to measure interest rates wherein one bps is
equal to 1/100th of 1%) whereas, other debt funds could charge up to 150 bps. So to make a choice
between one debt mutual fund, it is important to consider the management fee or the fund running
expense.

Best Debt Funds to Invest in 2020

Considering the above parameters we have shortlisted some of the best performing debt funds to
invest.

Fund NAV Net Assets (Cr) 3 MO (%) 6 MO (%

₹34.7594
PGIM India Short Maturity Fund Growth ₹37 1.7 6.6
↑ 0.06
₹27.0293
ICICI Prudential Long Term Plan Growth ₹3,737 2.2 6.7
↓ -0.01
₹83.2757
Aditya Birla Sun Life Corporate Bond Fund Growth ₹21,271 2.3 8
↑ 0.03
 Fund NAV for Article
Net Assets (Cr) 3 MO (%) 6 MO (%
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₹24.2162
HDFC Corporate Bond Fund Growth ₹20,062 2.3 7.9
↑ 0.01
₹17.3547
HDFC Banking and PSU Debt Fund Growth ₹7,544 2.5 7.4
↑ 0.00
₹22.7824
PGIM India Low Duration Fund Growth ₹65 -1 0
↓ 0.00
₹15.6359
Axis Credit Risk Fund Growth ₹613 2.6 4.5
↑ 0.00
₹412.939
Aditya Birla Sun Life Savings Fund Growth ₹14,006 1.7 4.7
↑ 0.10
₹15.8062
UTI Banking & PSU Debt Fund Growth ₹204 1.6 6.7
↑ 0.00
₹278.935
Aditya Birla Sun Life Money Manager Fund Growth ₹9,611 1.3 4.3
↑ 0.03
Note: Ret

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding
correctness of data. Please verify with scheme information document before making any investment.

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