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How to select the right debt asset

Did you know there is a whole different world of investments apart from stocks and equity mutual funds? Welcome to the world of debt investments. If you are interested in a steady income, capital protection and tax benefits, then debt investments are the right choice for you. Public Provident Fund (PPF), bonds, debt mutual funds and gilt funds are some of the popular debt funds available in the market. However, before you invest, there are a few important factors you should keep in mind before considering debt funds.
How to select the right debt fund investment:

a) Past performance
Past performance of a debt fund investment is no guarantee of future performance. Yet, it is important to check out how a fund has performed in the past. This is specific for debt mutual funds and it can help you get a better idea of the fund before you invest. Check how the fund has offered returns over different time periods such as six months, one year or even five years.

Also compare the debt fund performance against the benchmark in the sector. For instance, a fund may offer 9% returns and you might think it is the best debt fund for 6 months to invest in. But when you compare against the benchmark, you may find that there are other debt funds that offer better returns. As an investor, you should seek to choosing the right debt fund possible for investment.

b) Yield to maturity
Yield To Maturity (YTM) is defined as the total returns expected on a bond if the bond is held unto maturity. In other words, if you invest in a bond and make all the scheduled payments regularly, YTM is the internal rate of return on your investment. It is expressed as an annual rate.

YTM is a good measure to estimate if it is worth buying a bond or not. There are many online calculators to help you find out the YTM of a bond. If you find that the returns on the bond are lesser than your desired yield, it is better to search for a more suitable bond. You can also use YTM to compare different bonds that have different maturities and coupon rates.

c) Investment goal of the asset
There are many different debt instruments in the market and each asset has a specific investment goal. That’s why it is important to identify an instrument whose investment goal matches your personal investment goal. For instance, imagine you want a regular income and a low level of risk. For this, it is best to invest in government bonds or gilt funds since they offer regular interest payments and they carry very low risk.

d) Withdrawal facility
Public Provident Fund (PPF) is a very popular debt instrument for many investors in the country. It provides a fixed rate of return and offers a high degree of protection to the invested capital. However, it is important to remember that PPF is a 15 year scheme. You cannot make premature withdrawals or closures without meeting certain conditions. In comparison, a debt mutual fund allows you to withdraw amounts whenever you require.

This is not to say that debt funds are better than PPF. Instead, it is to inform that in case of emergency, you should know which assets allow quick access to funds. Make sure you know all about the withdrawal facilities available before you invest.

As an investor, your primary goal may be to earn the best returns possible. But that shouldn’t keep you from exploring other benefits. Different assets come with different advantages and disadvantages. By keeping the above factors in mind, you can identify the best debt assets that are ideal for you.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.