A wise investor once said debt mutual funds carry less risk and business owners should choose these funds for investing idle business cash. But he forgot to mention which type of debt funds he was talking about. And that is why we are writing this blog for those corporate owners who are stuck selecting the right debt fund for their portfolio. After all, as India’s First Business Wealth Management Platform, Shootih understands the importance of investing business money.
Let’s start with the basics!
What are debt funds?
Debt funds are the type of mutual funds that invests predominantly in fixed incomes, securities, like bonds, money market instruments, etc. These funds generate returns primarily through interest income earned on the underlying debt securities. Factors like interest rates, the credit quality of underlying bonds in the portfolio, and fund the manager’s decisions have an influence on these funds.
The working model of debt is quite simple. Lets’ understand with an example.
Debt funds operate similarly to banks lending money and charging interest. In the case of debt funds, investors lend money to companies and sometimes even the government. These entities, in turn, pay interest to the lenders. By investing in debt funds, investors act as lenders earning interest income on their investments. The fund manager selects a diversified investment portfolio of debt securities on behalf of the investors, ensuring a balanced risk profile. It allows investors to generate regular income and potentially benefit from capital appreciation as the fund’s underlying investments perform.
Key Advantages of Investing in Debt Mutual Funds
The key advantages of investing in debt funds are:
- Stable Returns: Debt funds offer investors the advantage of stable returns due to fixed interest rates. This makes them an attractive investment option, particularly for business owners with specific financial goals and a low-risk tolerance. If you have a limited time frame to achieve your financial objective or prefer a more conservative approach, debt funds can be a suitable choice.
- Flexibility: Debt funds offer the flexibility to choose investment durations according to your financial goals. Whether you prefer short-term or long-term investments, there are options available, allowing you to align your investments with specific timeframes and objectives.
- Short-Term Money Parking: Suppose you have funds that are supposed to stay unutilised for 7 days. The money if kept in the current account, will not fetch returns. These funds can be utilised better with Overnight Funds or Liquid Funds, and generate decent returns. Are There Different Types of debt mutual funds?
- Diversification: Debt funds provide diversification by investing in a wide range of debt instruments. This helps spread the risk across multiple issuers and sectors.
Are There Different Types of debt mutual funds?
Yes, there are various types of debt mutual funds to suit different investment needs and risk profiles. From overnight funds to long duration funds, each category offers unique characteristics and investment objectives. Understanding these types can help you make informed investment decisions. Check the image below to have a brief understanding of different categories of debt funds.
How to Find the Right Debt Fund to Invest Business Money?
To find the right type of debt mutual fund for your portfolio, you need to ask yourself the following questions.
What is My Investment Objective?
Before investing business money, it is important to assess why you are investing. Different investors have different goals, such as income generation, capital preservation, or a balance between the two. If you are seeking regular income, you may opt for a debt fund with a focus on coupon payments. On the other hand, if capital preservation is your priority, consider funds with a lower-risk profile, such as liquid funds or short-term funds.
What is My Risk Appetite?
Generally, debt funds are called considered comparatively safer investment options than equity schemes. However, the risk associated with debt funds may differ for different categories. Business owners before investing idle business cash, must analyse how much risk they can take. For example, the credit risk associated with the overnight debt fund is the lowest as they invest for a very short time. On the contrary, the same with short-term or medium-term funds is higher. Since the risk and returns are inversely related, corporates must align their investment with their investment objectives and expected returns.
Before investing business money in debt mutual funds, it is crucial to consider two main categories of risks associated with these funds, namely: interest rate risk and credit risk. Interest rate risk is mainly affected by the fund’s duration, whereas credit risk fluctuates with the credit quality of the underlying securities. We will explore these in detail in the upcoming section.
What is the Fund’s Credit Quality?
Credit quality is a crucial factor to consider when selecting a debt fund. Credit rating agencies provide ratings for various debt instruments based on the issuer’s ability to meet their obligations. Funds investing in high-quality instruments with higher credit ratings are generally considered safer. However, higher-quality debt funds may offer lower yields compared to funds taking on higher credit risk. Evaluating the credit quality of the underlying holdings in a debt fund can help you gauge the risk associated with the investment.
Read more about Credit risk at: How Can Businesses Deal With Credit Risk in Debt Mutual Funds?
How Liquid is the Fund?
The uncertainty of the business world is known to all. Due to this, liquidity stands as a first concern in front of business owners while investing in mutual funds.
When evaluating the liquidity of mutual funds, business owners should consider factors such as the redemption process, lock-in periods, fund size, underlying holdings, market conditions, and fund type. Understanding the redemption process is important, as it determines how quickly investors can sell their units and receive the proceeds. Lock-in periods can restrict access to funds for a specific duration, impacting liquidity. Liquid funds stand as the best choice for investors who desire liquidity. Some liquid funds don’t have the exit load, while with some the charges get laid off after a short period of time, like 7 days.
Does This Fund Align With My Investment Horizon & Interest Rate Sensitivity?
The fund’s duration help in measuring the changes in the fund’s value with changing interest rates. Let’s understand this with an example; Suppose ABC Co. has two funds in its portfolio: long duration funds and short duration funds. If the interest rate rises, the value of the long duration fund will have a sharp impact, whereas its impact on the short duration fund will not be as sharp. However, if the interest rate goes down, the value of long duration funds will go much higher than that short duration funds.
So, before investing in debt mutual funds, the fund’s duration is highly crucial to be aligned with the ideal investment horizon and risk tolerance.
Read more about Interest rate risk at: How Can Corporates Deal With Interest Rate Risk in Debt Mutual Funds?
What is the Expense Ratio of the Fund? & How is the Fund Managed?
Last but not least; the expense ratio, representing the annual cost of managing the fund, is another factor to consider. Lower expense ratios can positively impact the overall returns of the fund. Additionally, evaluating the fund management team’s expertise, track record, and investment philosophy is crucial. A skilled and experienced fund manager can navigate through market uncertainties, make informed investment decisions, and effectively manage the portfolio.
Our Two Cents:
Investing business money is a crucial decision and requires in-debt analysis of both investors’ objectives and risk appetite, along with the fund’s past performance, risk profile, management style, and more. If you are planning to embark on mutual funds investment journey, Shootih is the platform for you. The platform is specially designed for the business to make idle cash an additional revenue stream.
With Shootih—India’s First Business Wealth Management Platform, you can access a wide range of mutual funds carefully selected to suit the needs and preferences of businesses. The platform offers comprehensive information and tools to help you make informed investment decisions. You can evaluate the fund’s past performance, understand its risk profile, and assess the management style of the fund managers. Shootih provides a transparent and convenient way to invest, enabling you to diversify your investment portfolio and potentially maximize returns on your business cash.
The platform’s user-friendly interface and intuitive features make it easy for businesses to navigate and manage their investments. You can track the performance of your investments, monitor the progress towards your financial goals, and make adjustments whenever necessary. Shootih aims to empower businesses with the knowledge and tools needed to make smart investment choices and unlock the full potential of their idle cash.
All this can be better explained in a free demo call with our expert. Claim your free demo now by clicking here.
Disclaimer: Mutual funds are subject to market risks, read all scheme-related documents carefully.
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
