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.
5 things to keep in mind while dealing in the derivatives segment
Do you remember the first time you got on to a cycle? Your parents fitted the bike with side wheels so that you don’t fall. They also equipped you with a helmet and safety pads to avoid any injuries. Similarly, every time you start a new venture, it is best to know the precautions you should take in the currency derivatives segment in order to avoid making mistakes. This principle applies to the derivatives market too. Here are a few precautions you need to keep in mind when you deal in a derivatives segment.1) Options before futuresIn a futures contract of a derivative segment, you are obliged to follow through with a trade on a designated date and a specific price. For example, you may enter a futures contract to buy 100 shares of stock X at Rs 50 per share after three months. If the price of the share goes beyond Rs 50, you stand to benefit but if it lingers below Rs 50, you would be making a loss.But in an options contract, you can cancel the contract. In other words, you have the right to buy the stock but not the obligation. Your risk is limited to the amount of money you pay to buy the option. That’s why, if you are a novice investor, it may be better to start with options before moving on to futures trading. 2) Avoid illiquid optionsIn the derivatives segment in stock market, liquidity means that there are active buyers and sellers of a stock at all times. Generally, individual stocks are more liquid than options. This is because traders buy and sell the same stock in the market. But in case of options, there are multiple contracts available in a derivatives segment. You can choose different options with different time limits and strike prices. As a result, a few options can be illiquid as well because there may be little to no trading going on. When this happens, the spread between the bid price (how much an investor is ready to pay) and the ask price (how much an investor is ready to sell for) can be huge. When you choose an illiquid option, you may either get an unfavourable price when closing a position or may have to hold the option all the way until it expires. 3) Don’t trade without knowing the associated risksA number of factors can affect your position in the derivatives segment in market when you undertake a future or an option contract. International price movements, macro-economic factors, changes in government policies and market volatility are some of the factors that could impact price movements. Be aware of all these associated risks before you trade any contract in the market. 4) Avoid market rumoursIt is very important to take a calculated and informed decision when it comes to trading in the derivatives segment in share market. The internet is full of rumours and unsolicited tips regarding the best contracts that can help you make money. Don’t pay heed to these tips. Conduct your own research and find out the best transactions that fit into your overall investment plan. 5) Use your call options wiselyA call option offers the buyer the right to purchase a stock at a pre-determined price (also known as strike price). However, a big risk of using options is selling shares of a stock if you don’t already own it. This is known as a short call. This means you are selling a call option and you have to buy the stock at a fixed price in the future. This can pose a big problem if the stock price goes beyond the strike price. You would be forced to buy the shares at a market price that is much higher than the strike price; thus resulting in a loss. It is best to avoid short call until you gain experience in the derivatives market.To sum upThe derivatives field is large and full of potential. There are a lot of different ways you can make money in this field. However, if you are a beginner, it is important to be cautious when you invest through derivatives. The above list highlights some of the precautions you can take in order to invest successfully in futures and options. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
How to select the right mutual fund scheme
Mutual funds are a great way to invest your money and earn good returns in the future. But at the same time, you also know that mutual funds are subject to market risks. It is possible to lose money when you invest in mutual funds. Every advertisement on TV regarding mutual fund performance mentions this. So, how can you select the right mutual funds for your portfolio to achieve investment success?Well, let’s find out some of the factors you need to keep in mind before selecting a mutual fund1) Fund performanceImagine you have a long-term financial goal like buying a house. You know that you want to invest in equity funds. You may be interested in a particular fund. But is that the right choice for you? One of the first steps is to look at the mutual fund performance ranking. Look at the past reports of the fund to get a better idea of its performance. However, don’t look only at the recent performance. You need to analyse the fund’s performance over a significant period -so that you have adequate information to aid in decision making. This activity helps you get a snapshot of its past performance but it is important to remember that best mutual fund scheme performance is not the sole criterion to select a fund. 2) Experience level of the fund managerThe fund manager’s role is to ensure a mutual fund meets its financial goals at the right time. And to achieve this goal, a fund manager has to move funds accordingly, between different investing instruments. The fund manager has a very important role in the overall performance of the fund. So, as the investor, you need to take a look at the fund manager’s experience and past performance. You can also take a look at some of the other funds under his control. See how these funds have performed to get a better idea of the best mutual fund scheme to invest. 3) Expense ratioExpense ratio is the annual fee that is charged on mutual funds. This fee can vary between different kinds of funds. This depends on various factors such as the size of the fund and the category of investment. In addition, the investment strategy can also determine the expense ratio of a fund. For example, passive index funds which require limited investment strategy have lower expense ratios. Expense ratio is an important factor to look at because it can have an impact on your profits. Higher the expense ratio, lower will be your returns. 4) Exit loadExit load is a fee that is collected by the fund house when an investor leaves the mutual fund scheme. This cost is generally deducted as a fraction of your Net Asset Value (NAV). Compare different fund houses and identify which of them offer lower exit loads. This can help you retain a significant portion of your earnings at the time you leave the fund.The last wordThere are thousands of mutual funds in the market. Identifying the right fund for your portfolio is an important task in order to select the best mutual fund scheme for sip. By looking at the above factors, you can select any or a number of the best 10 mutual fund scheme that can help you maximize your returns in the long run.A number of useful resources are available that can help you to choose the right mutual fund. If you need in-depth guidance and assistance in selecting the right fund according to your risk appetite, you can opt for the expert services of a financial advisor. It is crucial to be restrained, reasonable and stay away from being influenced by short-term price fluctuations in the market. At the end of the day, it is essential to remember your financial objectives and the ultimate goal to build wealth in the end.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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