Debt Funds or better say short-term investing funds, that we choose to invest for our short-term objectives and goals. There is a minimum of 15 categories of debt funds which make it a daunting task for investors to choose one or more best suitable categories for their short-term goals, from a wide range of these debt fund categories.
Well, if you are one among those who are finding this task as difficult then avoiding the possible mistakes can help you pick up the appropriate funds category to invest for your short-term needs. Let us look at the mistakes that you must avoid while planning your investment in Debt fund categories.
Not Specifying Your Purpose
Investors have a lot of purposes to invest in debt funds, some investment to get some stable allocation for generating regular income, while some invest in funds, to balance their portfolio risk and add some long-term fixed income allocation to their overall portfolio. Some also invest in funds for a very short period with only objective, stable returns at low risk.
Specifying your goals to invest in debt funds is necessary, it helps you choose the right category of debt funds to invest. If you don’t specify the goal, you will end up picking the wrong match of debt category fund for your goal. For example, a short-term income fund which in turn invests in debt securities with a 2 to 3-year maturity will not suit your 3-month investment requirement.
Making Returns As Your Prior Goal
Debt funds are mainly meant for stable returns at low risk, if you choose to invest in debt funds for high returns, that means you need to choose funds with a higher risk in the portfolio. This high return can come at the cost of the quality, which can also lead to losses.
Thus, when you are choosing to invest in the debt fund category keep it simple and confine your objective to stable returns. Look at picking schemes with a high-quality portfolio, even it comes at the cost of return.
Ignore The Average Maturity Of The Portfolio
Do not forget to check the average maturity of the debt scheme portfolio where you are planning to invest. Generally, a short-term income fund should have an average maturity between 2 to 3 years, however, there are funds that have a lower maturity period than this and also funds that have a higher maturity period than this. If you choose funds with a lower maturity period than 2 years, you will end up receiving very low returns and if you choose funds with a higher maturity period than 2-3 years, there are chances of an increase in volatility in returns over the period of your investment.
Debt funds are not similar to Fixed Deposits. People prefer debt funds more because they want efficient returns at low risk. If still you are finding it difficult for you to choose the appropriate category of debt funds for your investment portfolio, I would suggest you consult a primewealth financial adviser team.