How to choose between different debt mutual funds in the market

Mutual funds have emerged as a popular route for wealth generation among individuals seeking a diversified and professionally managed investment avenue. Within various mutual fund options, debt funds can prove to be an attractive choice for risk-averse investors who are looking for relatively better return potential as compared to traditional fixed deposits. However, with a range of debt mutual funds available in the market, choosing the right one can be challenging.
Here, we will shed light on some of the different types of debt funds based on SEBI categorisation and help investors understand which fund can suit their specific investment goals and risk profiles.
While we provide insightful information, it is essential to remember that seeking the assistance of a financial advisor or distributor can further enhance the investment decision-making process.

• Table of contents

1. Liquid funds: Parking surplus cash for short term
2. Overnight funds: For quick access to funds
3. Ultra-short duration funds: A step ahead in tenure
4. Short duration funds: Balancing risk and return
5. Corporate bond funds: Focused on corporate debt
6. Medium duration funds: Moderate tenure, potential for higher returns
7. Credit risk funds: Seeking higher yields
8. Dynamic bond funds: Adapting to market conditions

Liquid funds: Parking surplus cash for short term

Liquid funds are a relatively low-risk, short-term investment option ideal for parking surplus cash or meeting emergency fund requirements. These funds primarily invest in debt instruments with a maturity of up to 91 days, ensuring high liquidity. Investors seeking relative stability and quick access to their funds can invest in liquid funds. However, it is crucial to note that these funds offer relatively modest returns as compared to other debt funds. Now that you know how to choose liquid funds for investment, you can consider investing in Bajaj Finserv Liquid Fund if you are looking for a short-term, low-risk/low to moderate risk investment option that can serve as a alternative to traditional savings accounts.

Overnight funds: For quick access to funds

The primary focus of overnight funds is to invest in overnight securities with a maturity of just one business day, ensuring quick access to funds. As an open-ended debt scheme, it aims to offer relative stability and relatively low interest rate risk and credit risk. This fund is aptly suited for:

• Institutions with surplus funds: Bajaj Finserv Overnight Fund presents an option for institutions looking to park surplus funds overnight. These entities often have funds that are temporarily idle and require a relatively stable liquid investment avenue to generate returns within a short timeframe. Overnight funds can serve as an efficient solution for such institutions.
• Investors with idle cash: Individuals or entities holding idle cash in their current accounts can benefit from investing in Bajaj Finserv Overnight Fund. Rather than letting the funds remain dormant, they can be put to work in this debt scheme to generate potentially additional returns. As the fund maintains relatively low interest rate risk and credit risk, it offers a relatively stable way to make idle cash work harder.

Ultra-short duration funds: A step ahead in tenure

Ultra-short duration funds usually provide slightly higher returns than liquid funds while maintaining a similar risk profile. They invest in debt securities with a slightly longer maturity duration of around 3 to 6 months. These funds are suitable for investors who can extend their investment horizon slightly beyond short-term goals to potentially enhance their returns in a stable and relatively low-risk environment.

Short duration funds: Balancing risk and return

Short duration funds offer a moderate risk-reward balance by investing in debt instruments with a tenure of 1 to 3 years. These funds are suitable for investors with a moderate risk appetite seeking relatively better return potential over the short to medium term. They can be an option for investors with financial goals that are a few years away, such as planning for a vacation or buying a vehicle.

Corporate bond funds: Focused on corporate debt

Corporate bond funds primarily invest in high-rated corporate debt securities, which carry slightly higher risk than government securities but offer the potential for relatively better returns. Investors who have a moderate risk tolerance and are willing to allocate their funds to quality corporate debt instruments can consider these funds for relatively stable wealth generation.

Medium duration funds: Moderate tenure, potential for higher returns

Medium duration funds invest in debt securities with an average maturity of 3 to 4 years. These funds can be an option for investors with a slightly higher risk appetite and a time horizon of around 3 to 4 years. They offer the potential for relatively better returns compared to shorter-duration funds, while still maintaining a commensurate risk profile.

Credit risk funds: Seeking higher yields

Credit risk funds aim to generate relatively higher returns by investing in lower-rated debt securities, which come with an elevated credit risk. These funds are suitable for investors who can tolerate higher risk and seek potentially better returns over the medium to long term. However, it's important to note that these funds can be volatile, and investors should carefully assess their risk appetite before investing.

Dynamic bond funds: Adapting to market conditions

Dynamic bond funds have the flexibility to adjust their portfolio duration based on market conditions. They invest in debt securities with various maturities, making them suitable for investors seeking professional management of their investments in the ever-changing interest rate environment. These funds are ideal for those who want to entrust their investment decisions to experienced fund managers and are willing to bear risks associated with dynamic bond funds.

Conclusion

Debt mutual funds offer a range of investment opportunities catering to different risk appetites and time horizons. As an investor interested in wealth generation through mutual funds, understanding the SEBI categorisation and the unique characteristics of each debt fund can help you make informed investment decisions. Remember, it is essential to evaluate your risk tolerance, investment goals, and time horizon before investing in any mutual fund. While this article provides valuable insights, it is always wise to consult a financial advisor or distributor to tailor your investment strategy according to your specific financial needs.

FAQs:

What factors should I consider when choosing a debt mutual fund?

Evaluate the fund's investment objective, duration, credit quality, and expense ratio. Choose based on your risk tolerance, investment horizon, and financial goals.

How do debt mutual funds differ from one another?

Debt funds can vary in terms of the type of debt instruments they invest in, duration of investments, and credit risk. Some may focus on government securities, while others on corporate bonds

How can I assess the risk associated with a debt mutual fund?

Look at the credit rating profile and average maturity of the fund's portfolio. Higher credit risk and longer maturity periods indicate higher potential returns but also higher risk.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.