Mutual funds have become one of the most popular investment instruments in India. Apart from the much-needed flexibility and liquidity, they offer you a chance to earn inflation-beating returns. Moreover, you can choose a mutual fund to invest your money in as per your risk appetite and investment horizon.
If you have a high-risk appetite, you can invest your money in equity mutual funds. Otherwise, you can opt for debt mutual funds if you don’t want to expose your investments to the risks associated with the equity markets. However, you need to be wary of certain things if you want to invest in these funds.
Given below are the mistakes you need to avoid while investing in debt mutual funds:
- Not investing as per your risk profile
This is one of the most common mistakes many people make while investing in mutual funds. Debt funds are suitable for risk-averse investors who can compromise a bit on the returns. It’s very important to know your risk profile and invest accordingly.
If you can tolerate a bit of fluctuation in exchange for high returns, it’s better to invest in equity funds. Otherwise, you should opt for debt funds. Your age and investment objective should also play a role in determining whether you should invest in debt funds or not.
- Ignoring the risks associated with debt funds
Debt funds are indeed less risky than equity funds. However, it doesn’t mean that they are completely risk-free. Debt funds mainly invest in interest-generating securities, such as corporate and government bonds, debentures, treasury bills, and other money market instruments.
Any changes in the interest rates can affect the performance of debt funds. The Net Asset Values (NAVs) of these funds usually go up when the interest rates fall and vice-versa. It’s prudent to keep these factors in mind while investing in debt funds.
- Not picking debt funds as per your investment horizon
In total, there are 16 types of debt mutual funds. They differ from each other in terms of risks associated with them and income-generating abilities. You must pick the right debt fund that aligns with your investment horizon.
For example, if you’re investing to meet a short-term financial goal, you should invest in a debt fund that is investing in short-term fixed-income securities. You can also invest in ultra-short-term debt funds if your investment horizon is less than one year.
- Investing without checking the AMC’s credit ratings
You might have heard about the term ‘credit score’. It helps the lending institutions determine the creditworthiness of a borrower and evaluate whether they should give them a loan or not. Similarly, there are credit ratings for mutual funds.
Based on the Asset Management Company’s financials, debt repayment capability, and historical performance, a credit rating from A to D is assigned to them. You should always look at this credit rating of an AMC before investing in its debt funds.
The bottom line
Debt funds should be a part of every investor’s portfolio. They protect the investments from market volatility and provide stable returns. However, one should also keep the above-mentioned points in mind while deciding to invest in debt funds.
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