Debt Fund Investment Starter Kit 🚀💡
Hola!
Happy “I feel so poor after Instagram overfed Ambani wedding content to me” week to you! You are so not alone, haha!
What I was up to: Although last week was off to a great start in terms of productivity and getting things done at work, I fell sick…. again! And falling sick with a toddler around is 😮💨 no joke, I am incredibly tired. But the silver lining is that I’m heading out for a holiday with my family and that’s something to look forward to!
Market ka haal: Despite mixed trends from the global markets, the Indian stock market has been doing great for six consecutive weeks now. While D-Street remained closed on account of Muharram yesterday, domestic benchmarks scaled their fresh all-time high levels on Tuesday, led by gains in FMCG, technology, and realty stocks. The 30-share BSE Sensex pack hit a lifetime high of 80,898 before settling 52 points or 0.06% up at 80,717.
The broader NSE Nifty index touched a record peak of 24,661. It eventually closed 26 points or 0.11% higher at 24,613. Market sentiments were boosted following the better-than-expected Q1 earnings of domestic IT companies despite caution ahead of the Union Budget limiting gains, buying in select heavyweight stocks helped the market move upwards. 🥳🥳
Humara Gyaan: If you've been investing for a while and looking to diversify, debt funds are a great option. But before you dive in, please understand that just like how all mutual funds, debt funds carry risks, too. Here are 3 pro-level parameters to look for if you're over the vanilla phase of deciding based on how long you want to be invested and identifying investment objectives:
1. Yield to Maturity (YTM) 📈
Want an idea of what your debt fund might earn? Check out the fund’s YTM! It estimates potential earnings if the fund manager holds all the current investments till maturity. But remember, YTM changes as the fund manager buys and sells debt papers.
Pro tip: Compare the YTM of your chosen fund with the category average. If it's higher, you might have a winner! You can find this info on mutual fund research websites.
2. Rating of the Papers 📊
In addition to interest rate risk, debt funds are also susceptible to credit risk. Companies receive credit ratings similar to our credit scores, which indicate their likelihood of repaying loan interest and principal. AAA is the highest rating, signifying the best creditworthiness and the highest probability of honoring debt obligations. Because of this, AAA-rated papers typically offer lower interest rates compared to lower-rated ones.
Pro tip: When analyzing debt funds, assess whether the fund is taking on excessive credit risk in pursuit of higher returns. A fund with too many lower-rated papers might offer higher yields, but it also comes with an increased risk of default.
3. Macaulay Duration ⏳
Macaulay Duration measures the average time it will take for you to get back the money you invested. It's the weighted average time to receive the cash flows from a bond so that the present value of these cash flows equals the bond price.
Why care? It helps you align your investment with your time horizon. If a fund’s Macaulay Duration is three to six months, it's best for investors with a similar investment horizon.
Remember: Macaulay Duration is inversely related to the bond's coupon rate and interest rate, and positively related to the time to maturity. This means the longer the duration, the more sensitive the fund is to interest rate changes.
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While there’s no magic formula to consistently make money while staying invested, diversification is the closest you can get to it! Investing in debt funds isn't a set-it-and-forget-it approach. Regularly monitor your investments to ensure they continue to meet your expectations and adjust as necessary.
To finding your sweet spot🍻
Niyati ❤️
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