Here is a 7 Step Guide to avoid Fatal Traps in Debt Funds.
Rather than parking your surplus money in a bank account or fixed deposit, Park them in a Debt fund for benefits like higher returns, regular income, high liquidity, low risks, reasonably predictable returns, and the benefit of Indexation.
Debt funds are definitely great investment vehicles if you select them smartly based on your investment objective and risk appetite.
1) Liquidity: Look for the exit option of the fund and avoid close-ended funds. No liquidity when in need of funds can be a pain for your investment portfolio.
2) Investment Horizon: Don’t choose a fund simply because it is offering great returns. It is really important to figure out your investment horizon and then choose a fund with a matching profile. Parking for Long-Term in Liquid fund is not a good idea.
3)Taxation: Debt Mutual Fund comes with indexation benefit when redeemed after 3 years and taxed as per your slab if redeemed before 3 years.
4) Credit Rating: Some schemes may bet on lower-rated papers to generate better returns, but it comes with the risk of losing money. So, if you are a conservative investor, you should opt for high rated papers and invest in lower-rated papers to generate extra income.
5) Interest Rate Movement: Change in interest rates has a big impact on debt schemes. Rising interest rate is bad news for most debt funds whereas A falling rate scenario is a treat. This is because of the inverse relationship between yields and prices of bonds.
6) Brand: Invest with reputed Indian brands such as ICICI, Kotak, IDFC, HDFC, SBI Etc. Avoid new & small fund houses. Why put your hard-earned money in lower brands for mild gain.
7) Fund Size: Large funds can distribute fixed expenses over a number of investors bringing down the expense ratio. Large funds can also negotiate better rates with issuers of debt.