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Guide To Choosing The Right Debt Fund
If you are new to investing, you might have a tough time determining where to invest. There is a plethora of investment schemes to choose from, however if you aren’t good with financial planning you might not be able to make an informed investment decision. The first step of financial planning is determining your short term and long term financial goals. When you have a defined set of goals, investing might become a lot simpler. Goal based investing never fails because if you have been living in a small house all your life and start investing to get a bigger home, you will make sure that you continue investing till your dream of buying a bigger home comes true.
Back in the day, the Indian investor had no option but to choose from conservative investment options. Conservative schemes offer fixed interest rates, however over the past few years interest rates have been collapsing drastically. All you get is 5 to 7 percent on your investment amount. Also, conservative schemes have lengthy lock-in periods. This means that you cannot liquidate your investments in case of an exigency.
Due to so many drawbacks in conservative schemes, retail investors are shifting to modern investment schemes like mutual funds. Mutual funds are a pool of professionally managed funds that invest in a diversified portfolio of securities for income generation. Mutual funds are assigned fund managers who offer active risk management by buying / selling securities in quantum with the scheme’s investment objective. What fund houses owning mutual funds do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economies. Depending on the nature of the scheme and its investment objective, a mutual fund may invest in various asset classes like equity, debt, gold, real estate, etc. Apart from this, it might also invest in money market instruments like call money, G-sec, company fixed deposits, corporate bonds, debentures, commercial papers etc.
If you are planning to switch from conservative schemes to a better return offering scheme, you can consider investing in debt fund. Debt funds are open ended schemes that invest in debt and other money market instruments for income generation. While equity funds invest in equity, debt funds invest in fixed income securities that generate regular income.
Guide to choosing the right debt funds
There are around 15 debt schemes available for investing, however depending on your investment objective, investors should not invest in more than 2 or 3 debt schemes.
Liquid fund: A liquid fund is an open ended debt scheme which invests in fixed income securities that mature over a period of 91 days. Liquid funds are ideal for investors who want to park their money for a short period of time. If you receive a large surplus from a policy that recently matured or if you inherited some money from an estranged relative, you can park that in a liquid fund and earn interest. You can redeem your liquid fund units instantly and the money will be transferred to the registered bank account.
Overnight fund: Overnight funds invest in overnight securities. These funds are ideal for investors who wish to build an emergency fund or a medical fund. Since these funds invest in securities that mature in just one day, overnight funds do not have credit risk.
Long duration fund: A long duration fund, as the name suggests is ideal for investors with a long term investment horizon. This fund invests in debt securities and money market instruments such that the Macaulay duration of the portfolio is longer than 7 years.
Investors are expected to discuss their financial goals with their financial advisor before investing.