1. Predictable Returns

Most debt funds invest in securities that generate fixed interest. These are known as fixed income securities. That’s why top debt funds are known to generate stable returns of 4% to 6%. 

While this may not be as high flying as small-cap funds, mid-cap funds, or large-cap funds, it is known to provide stability to conservative and aggressive portfolios alike. 

2. Low Fees

Debt funds are designed to be low-cost investments. This design makes more sense when you consider the type of securities they invest in and the stable returns they generate. 

Thus, the investment fee charged by a debt fund is known to be low. Take a look at the table of best debt funds for 2022. You’ll notice that most debt funds’ expense ratio is less than 1%, except for one.  

3. Diversification

Just like other mutual funds, you can get a lot for the price of one when you invest in a debt fund. The average debt fund can invest in multiple bonds, commercial paper, and more based on the philosophy it follows.  

What this means for you as an investor is that you don’t have to do the heavy lifting - a professional fund manager will handle the buying and selling of debt securities in the complicated bond market. 

Watch this video to know why you should let an expert pick mutual funds.

1. Over/Under Diversification

Investing in a single debt fund gives you access to multiple fixed income securities. What most investors don’t realise is that investing in multiple debt funds can effectively stunt wealth creation. 

For example, buying too many debt funds with overlapping portfolios would mean that you’re paying too much in the form of investment fees for the same bunch of securities. 

2. Credit Risk

There are good debt securities that have a high credit rating. This means that they have a better chance of paying back their debt. Generally, this is denoted by SOV, AAA, and AA+. 

Top debt funds like the ones on Cube invest in such high rated debt securities. That said, there are bad debt securities as well. They may have a poor credit rating. 

If a debt fund is investing in such a security, it’s best to steer clear of it. To know more, consult a financial expert like a Wealth Coach who can help you choose the right debt funds.  

3. Interest Rate Risk

You may have noticed the words interest rate pop up multiple times throughout this blog. Fixed income securities generate interest that’s distributed to debt fund investors as returns. 

The securities that generate these returns are affected by RBI’s interest rate changes. If the RBI decides to increase the interest rate, bonds are known to lose value and by association, debt fund returns dwindle.  

1. Your Risk Appetite

At the end of the day, debt funds are linked to the market and are prone to credit and interest rate risks. As an investor, you must evaluate whether you can sail through these risks. 

The best way to get an idea of your risk profile is to:

1. Take a risk quiz and let Cube’s Perfect Portfolio feature suggest investments
2. Speak to a Wealth Coach who will understand your life goals, risk profile, and more to suggest investments  

2. Your Financial Goals

Top debt funds are known to be ideal for short to medium term goals that lie between 1 month to 3 years. For example, building an emergency fund or buying a new mobile phone.  

You must understand whether you have short to medium term goals and then proceed to invest in debt funds that can help you meet them. For more information on defining investment goals, read this.  

3. Quality & Track Record

Considering there are hundreds of debt funds and thousands of mutual funds in the market, it’s important to understand that not all funds will be good or bad. 

Evaluating each fund on multiple criteria is necessary to ensure that you choose the right ones. This means going beyond a debt fund’s star ratings and into details like the track record, turnover, and more.

Doing this may be difficult for working professionals. That’s why you could benefit from a service like Cube that gives you access to debt funds that can work for you. Download Cube To Know More.

Note: Facts & figures are true as of 30-05-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in assets like stocks, mutual funds, alternative investments, and others.