As a business owner, it’s essential to ensure that your investments generate a reliable and steady source of income. Debt funds are an excellent option for business owners who want to invest their surplus funds in a secure and stable investment avenue. These funds invest in fixed-income securities such as bonds, treasury bills, and other debt instruments.
Having said that, before you invest business money in debt mutual funds, there are certain rules you need to abide by to maximise gains. What are they? Let’s find out.
Know Your Corporate Goal
Investing without a goal is like a ship without radar. Before you invest business cash in debt funds, identify the goal for which you are investing. Is it to build a corpus to fall back on during an emergency or to fund expansion? Or is the investment from the point of view of having funds to deploy new technology? Knowing the goal is essential as it will help you zero in on the right fund to accomplish it (see image).
Assess the Credit Ratings of the Fund’s Portfolio
Another essential thing to consider is the fund’s credit rating. Most business owners make the mistake of choosing funds only on returns or past performance. Regarding mutual fund investment, past performance is no guarantee of the future.
To prevent credit risk associated with debt funds, it is vital to invest in funds holding high-quality bonds in the portfolio (rated AA or above). A debt fund with quality bonds lowers the chances of default significantly. You can find out about it in the factsheet of the fund that you can download from AMC’s website. The credit rating is mentioned against each instrument. Look at the image below to know the meaning of the ratings.
Keep in Mind the Expense Ratio
Another crucial thing to keep in mind is the expense ratio. A high expense ratio can eat your profits. On the other hand, investing in a fund with a low expense ratio keeps your profits intact. You can learn about the expense ratio of a particular fund on AMC’s website.
Having said that, expense ratio shouldn’t be the only thing to consider before investing in a debt mutual fund. You need to factor in other things like the fund’s long-term track record and consistency of returns, among other things.
Be Mindful of Interest Rate Changes
While it’s vital to be mindful of the fund’s credit rating, keeping a tab on the interest rate change is equally essential. This is because interest rates and bond yields share an inverse relationship. When rates go up, yields fall and vice versa. In a regime where rates are high, it is advisable to go for low-duration funds as the maturity period of their underlying portfolio is lower than long-duration funds.
As the maturity period is less, low-duration funds are less susceptible to interest rate risks, and this prevents the gains from taking a dip when rates go up.
Summing it Up
Keeping in mind the above pointers while investing business money in debt funds will not only help you pick the right fund but also maximise returns from it. To invest idle business cash in mutual funds and grow profits, you can bank on Shootih – India’s First Business Wealth Management Platform.
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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.
Before investing in debt funds, business owners must be mindful of their corporate goals, credit rating of the fund’s portfolio, and expense ratio among others.
