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Pointers to keep in mind when selecting a debt fund

 


Duration: First see if the fund manager's mandate is what suits you. You cannot have an investment horizon of 45 days and invest in a long-term debt fund

 

Returns: Is the fund generating higher returns than its peers? Check the portfolio. It could well be that the fund manager is compromising on quality of paper to generate those extra returns (see: What risks does your fund manager take?).

 

Size: In the debt market, on an average, the minimum lot size is around Rs 5 crore while the minimum ticket size in a primary issue could be Rs 50 crore. Hence a very small fund is at a distinct disadvantage. On the other hand, a large-sized fund may be in a position to strike better deals but if faced with huge redemptions, the market might not have adequate depth to bail it out. Avoid the two extremes.

 

Costs: Expenses have a significant impact on the relative performance of debt funds. It's important to see that your debt fund does not have the highest expense ratio while delivering just about average or below-average returns. The spread of returns, especially in big short-term fund categories, is very narrow. A small difference in return can significantly change the ranking. For example, among institutional ultra short term funds, 1-year returns of around 20 of the 49 funds is stacked in a range of 0.40 per cent.

 

Match scheme to invest horizon

Categories

 

 Average Maturity of Portfolio

 

 Investor's time frame

 

Liquid

 

Securities with maturity of maximum 91 days

 

Money on call. With virtually no downside risk.

 

Ultra-short term

 

Average maturity over the last 18 months is less than a year, but which are not liquid funds

 

1 to 3 months

 

Short term (including Gilt schemes)

 

Average maturity over the last 18 months is between 1 year and 4.5 years

 

Upto one year at least

 

Short term (including Gilt schemes)

 

Average maturity varies as per declared objective

 

Should be used opportunistically as per the interest-rate scenario to optimise returns

 

 


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