Dhirendra Kumar suggests ways of investing in debt funds and the things to look out for while selecting a debt fund
29-Nov-2019
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I want to invest Rs 5 lakh in an ultra-short-duration fund. Should I invest it at one go or spread it across a specific time period? Also, how can I choose a good fund in this category?
- Deepak
In any debt fund, you can invest big lump sums instead of SIPs. When it comes to investing in equity, it is important to spread your investments through an SIP in order to avoid catching a market high. This is important because if you invest a lump sum and the market falls soon after that, it could be quite unnerving for you to see your investment decline from Rs 5 lakh to Rs 4 lakh. However, when it comes to debt funds, the magnitude of a fall is not the same as equity. Even if you choose a bad fund, debt is not that volatile an asset class. Therefore, a one-time investment is fine here.
While selecting a fund, do not invest in a fund that outperformed its peers in the past year. Chasing recent performance is a big no in the case of debt funds. Besides, avoid the fund that is giving the highest return. This is because there is a possibility that the high return is due to a certain amount of risks taken up by the fund which at present may be hidden from you.
Such risks may cross your paths only once in a while. However, being prepared for it is the key, especially this time around when big companies have been defaulting on their bonds. Therefore, look at the credit-rating break-up of the underlying portfolio of funds before settling in.
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