How to choose the right debt funds for your portfolio?

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Mutual fund investments can help you grow your net worth and ease financial anxiety as long as you invest at the right time and in the right mutual funds online. These decisions can be made based on your risk tolerance and future goals. For investors who like to keep low to moderate risk on their investment portfolio in return for stable, moderate optimal rewards, debt funds can be the ideal choice.

debt funds

If you wish to invest in debt funds, here are some things that can help you pick suitable options for your portfolio:

1. Look at the risk:

While debt funds are the less risky out of the lot, they are not entirely free from risk. There are two types of risks involved with investing in debt funds – credit risk and interest risk. Credit risk is associated with the credit score of the company. Like the CILBIL score, companies also have a credit score known as the CRISIL or ICRA score. CRISIL and ICRA are agencies that rate companies. For example, AAA is the highest, followed by AA and D. To ensure low credit risk, and you should look for debt funds with the highest ratings.

On the other hand, interest risk refers to the risk caused by changing interest rates of debt funds as per the market. Keep in mind that while debt funds are less volatile, they are still investment instruments and all investment instruments carry some amount of risk.

2. Know the different types of debt funds:

There are different types of debt funds and knowing what these are is essential to ensure that you make the right choice. Some types include overnight funds, liquid funds, gilt funds, and fixed maturity plans.

For example, liquid funds usually invest in securities with a maximum maturity period of 91 days and are low-risk. On the other hand, Gilt funds invest a major portion in government securities and can pose some interesting risk for investors as the investment tenure can be longer here. Knowing the different types of debt funds is important as it lets you align your goals accordingly. For instance, gilt funds and fixed maturity plans are ideal for long-term goals, whereas liquid funds can offer short-term growth.

3. Check the expense ratio:

The expense ratio is the management fee you pay for your investment. Since it comes out of your earnings, make sure you pay attention to the expense ratio of all mutual funds you invest in. Liquid funds usually have the lowest expense ratios.

Whether you invest in a lump sum or choose SIPs, make sure to analyze your goals in detail before investing in debt funds. It also helps to consult a financial advisor before you invest in these funds. Once you have consulted a professional, you can explore different debt mutual funds online options with Moneyfy app.