The debt funds invest in fixed income instruments like government bonds, treasury bills, short-term papers and company bonds. That is why these funds are treated as a secure means of investments and have predictable results. However, there have been bond failures that have caused these funds to result in some casualties. Lots of investors keep their emergency money in debt funds and negative returns can cause some injuries. Let us take a look at how to play safe with debt funds.
Understand the debt funds - Debt or bond funds should not be seen as a means to build wealth. You cannot expect to earn great returns from these products. They would offer returns similar to fixed deposits with some risks involved. They would also offer better taxability compared to fixed deposits.
The fund managers - As a fund manager of debt funds, a person is not trying to generate returns, but manage the risks. This is the most important responsibility of the fund manager. So, you should check the track record and experience of the fund manager who is responsible for the funds in which you invest your capital.
Risk attitude of AMC - In order to lure the investors, a lot of AMCs encourage their fund managers to put funds in securities with high returns. In the recent defaults, it has been seen that the AMCs have been hit hard. It would be helpful if you avoid those Asset Management Companies (AMCs) that try to take risks. Investors should choose the funds which have a good track record.
Type of fund - The market regulator SEBI has separated debt fund into 16 groups based on the scheme characteristics. This depends on the type of securities that the particular debt fund invests in. The risk increases with the duration of the security. If you would like to play safe, you should invest in the securities with short duration like the overnight fund, short-term fund, ultra-short-term fund or liquid fund.
Check the portfolio - Before you invest in a scheme, you would need to see the portfolio. You should ensure that the fund is not overexposed to a company or a group of companies. A higher distribution of investment money would ensure better safety.
Choose the appropriate debt fund - Debt funds can be broadly classified into 4 categories - short term, liquid and money market, credit risk funds and dynamic or long term funds. Though the market risks are low, these funds can have credit and default risks. These funds are meant to act as a place for your short-term cash surplus. The short-term bond funds have higher market risks compared to liquid and money market funds. They can be alternate to short-term fixed deposits. The dynamic bond funds can have high market risks. They can often have periods of low or negative returns.
If you keep in mind these simple tips, you can keep your money safe in debt funds. Since you put your emergency funds in debt markets, you should consider their safety.