Although it is advisable to have a long term investment horizon when considering investing in financial tools like mutual funds, there can be incidences when an investor’s goals are short term based. When you have short term financial goals, mutual funds like debt funds can be an ideal choice for you.
Mutual funds can be one of the investment tools which can help potential growth seekers get some returns. Mutual funds do have risk, but this doesn’t necessarily translate into inevitable losses. It all depends on the mutual fund you choose, the past track record of that mutual fund, the management that runs that mutual fund, the assets in which the fund invests, etc. It also depends on your investment objective and the mutual fund you decide to invest in, to meet your financial goal.
Debt Funds invest in securities that have a short maturity period, and this is what makes them an ideal choice for investors with a short term objective. While equity mutual funds invest in shares of publicly listed companies, debt funds invest in fixed income securities issued by the government and companies. These fixed-income securities include corporate bonds, government securities, treasury bills, money market instruments and other such debt securities. Debt funds are less risky than investing in equity mutual funds and have the potential to offer better returns as compared to traditional saving products.
However, there are few things to consider before investing in debt funds. We have five factors every investor must look out for in a debt fund:
1. Invest according to your investment objective
Although debt funds are a decent option to fulfil an investor’s short term objective, there are 16 debt fund categories, and sometimes choosing a scheme that aligns with your investment objective might get a tad confusing. Hence investors should always invest in keeping their investment objective in mind.
2. Track the performance of the debt fund
A debt mutual fund with a proven track record has the potential to offer investors with decent returns. Yes, it is indeed true that that past or historical data of any fund doesn’t replicate its present or future. However, a fund with a good track record signifies it being handled by professional management. And you would definitely want to invest your hard-earned money in a fund that not just has a proven track record, but a fund that is run by reputed management.
3. Choose a debt fund which has a low expense ratio
An expense ratio is nothing but the cost of owning a fund, and it may have an impact on the returns provided by the scheme. You might invest in a debt fund that is constantly giving high returns but remember that the higher your profits, the expense ratio of the fund will increase. Hence you should also be aware of the expense ratio being charged by the debt fund you are planning to invest in.
4. Risk appetite
Although debt funds indeed carry far less risk as compared to equity funds, they do carry some amount of risk with them. That’s because no investment is considered to be a risk-free investment, and hence, investors should identify their risk appetite before making any type of investment. Understanding one’s risk appetite might allow an investor in knowing their limits and might also help them choose a scheme that shares a similar investment objective as theirs.
5. Exit load
Exit load refers to the fee charged by a fund house from the investor during the time of the withdrawal or redemption of the debt fund units. If a debt fund has an expensive exit load, it might be of disadvantage to the redeemer. Hence, it is advisable to research the fund’s exit load before making an investment decision.
We hope that investors consider the above factors before putting their hard-earned money in any investment scheme. Debt funds can be one of the investment tools to achieve short term goals, but investors should make sure that they invest within their boundaries if they want to increase their chances of earning some returns.