How to choose a debt fund

POSTED BY Sambaran Mitra ON March 13, 2011 7:51 am COMMENTS (3)

I am confused about how to chose a debt mutual fund. My questions and concerns given below:

  1. Is it true that debt funds with long-maturity are more high-risk-high-gain than short-maturity funds?
  2. I have decided not to trust any credit rating agencies after 2008 sub-prime crisis. That leaves me only with gilt-funds for my debt portfolio. Any comments regarding this thought process?
  3. I have heard that institutions invest heavily in debt funds. If in my debt-fund, a major chunk is made of institutional customers (rather than retail customers), I expose myself to whims of the institutional customer. Is there anyway to find out what percentage of debt-fund-customers are retail and what percentage is institution/company? Any comments about this approach of treating retail-customer-percentage as a parameter for chosing a debt-fund?
  4. Unlike equity, in debt fund size matters. Is this statement true?

3 replies on this article “How to choose a debt fund”

  1. wiki says:

    Many colleges and community organizations offer courses in money management. These courses are aimed at individuals who are having trouble with debt, those who want to avoid the problem or those people who want to use what money they have more efficiently and effectively to meet their financial goals. The skills gained in a money management course can set people on the road towards financial stability rather than debt. Thanks.
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  2. Manish Thanks.
    On #2, I am not expert enough to do research on debt quality. Before 2008 I really trusted the AAA, AAA+ ratings. Now I don’t. I know that even soverign-gilt may become risky (think Greece) but you have to start trusting at some level. I chose soverien-gilt as my trusted-instrument. Please point out the deficiencies/drawbacks of this reasoning.
    On #3, even on those funds which are not marked institutional, partnership-firms, companies and trusts are eligible to invest. If there are a few big investors like this, the fund becomes risky for a small retail investor. That is my concern for debt funds. For equity funds, the secondary market is bigger and more liquid and the same concern does not apply.
    On #4, Big was my bet for safety of debt-funds, not for returns. The reasoning is same as that of #3. For a big fund, redemption request of a few customers will not lead to distress sale. I feel that secondary market for any debt instrument is tiny compared to that of an equity-share. Please correct me if I am wrong on this assumption.

    On a slightly separate note, the literature on debt-fund is very limited compared to equity funds. I could not find answers to questions like “Which kind of debt-fund is good for putting your rebalancing-money”? By rebalancing-money I mean the money I get by selling my equity-component to revert back to my asset-allocation. I cannot decide whether rebalancing-money is short-term or long-term as it depends on market.

  3. Sambaran

    1. Yes, its generally true for all the products , especially equity .

    2. If you dont trust them , its fine , but then you can do your own analysis and findings .. how are you left with just some products ?

    3. You are partially right . There are debt mutual funds especifically for Institutions , where it says in the name itself (there is a word “Institutional” at the end) . The minimum investment in that category is always in crores . So you dont have to worry much on this .

    4. Big will be better , but not in performance , but may be management and costs .


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