One of the unfortunate but common mistakes made by amateur investors is to direct all their funds into one kind of investment. The hallmark of a successful investor would ideally be a diversified portfolio. In short, this means that the investor will need to have exposure to multiple asset classes. Apart from equity, one such major asset class is debt. Debt is one of the most prominent markets where investors can put their money to multiply their wealth. For those starting their investment journey, debt fund These are an important segment that should be a part of their portfolio. But before going into the details of what to know before choosing a debt fund, one needs to understand what a debt fund is and how it works.

What is Debt Fund?
Simply put, debt funds are mutual funds that Investment Investors’ money in fixed-interest-generating securities, including government and corporate bonds, debentures and other money market instruments. Debt funds are often considered to be safe against the volatility that comes with the equity market as debt funds come with low returns with low risk. They come with different maturity periods and can generate income at the time of maturity or from time to time.

Debt funds are one of the best investment options for investors with low risk appetite as they are not volatile like equity investments. However, investors, especially those who are new to investing, often find themselves at a crossroads while choosing the most suitable debt fund for their portfolio, financial goals and requirements. That said, what one needs to know before investing in debt funds.

interest rate fluctuations
As mentioned earlier, debt funds are fixed investments, and fixed investment securities react inversely to interest rates. This means that an increase in the interest rate will lead to lower returns on debt funds and vice versa. Additionally, the longer the maturity period of a debt fund, the higher the risk of interest rate fluctuations. However, investors may need to have a longer investment horizon to get better returns/capital growth. While debt funds are also subject to the risk of interest rate fluctuations, they offer investors flexibility in entry and exit from the fund.

credit quality
As an investor, it is essential to understand that debt fund holdings are classified on the basis of credit ratings given by rating agencies – AAA, AA+, A1+, etc., and investors can choose funds based on that. For example, an AAA credit rating means there is low risk but high quality – best suited for conservative investors. On the other hand, debt funds with low credit ratings may come with a higher stake. It’s best to choose a fund that contains the majority of high-quality bonds, but also do thorough research before considering investing in a fund with a lower rating.

long term taxation benefits
The period for which a fund is held affects the taxation benefits an investor will receive. Debt funds held for less than a year may attract short-term capital gains tax for the investor. However, debt funds held for more than one year will attract a long-term capital gains tax of 20% and will include indexation benefits.

expense ratio
It is essential to consider the expense ratio before investing in debt funds. If a debt fund gives 10% return, the investor will not receive the full amount as the AMC (Asset Management Company) deducts charges such as operating charges and other overhead charges. These are the expense ratios mutual fund Investors need to keep these things in mind before choosing a debt fund. It is best to opt for a fund where the expense ratio is minimal.

Diversifying Your Portfolio with Venture Loans
As mentioned earlier, diversification is an important aspect in the journey of becoming a successful investor. And there is one section that should be considered, especially if the investor plans to become an angel in the future – venture debt funds. Simply put, a venture debt fund invests in startups along with equity investors, enabling them to meet their working capital requirements. However, in lieu of debt, venture debt funds can receive part of the equity stake in the company. Enterprise debt facilitates profitability and growth and is also more affordable than equity. In addition, venture debt also does not reduce founders’ stake in startups, and can offer higher returns.

Epilogue
We have often heard ‘Mutual funds are subject to market risk’ on many announcements and advertisements. Among the mutual funds available in the market, debt funds are the safest with relatively safe returns, increased liquidity and convenience, making them one of the most sought-after investment instruments in the market, especially by low-risk investors. Appetite. The only thing to remember would be to do thorough homework before starting your investment journey and check the best performing funds to get maximum returns.

The author is the co-founder and CEO of Mumbai Angels.