How to evaluate Debt Mutual Funds

It's important for you to consider the following while choosing an appropriate Debt Mutual Fund -


Stated investment horizon
Maturity profile
Credit rating profile
Asset allocation in Fund Portfolio
Other quantitative indicators

This information is available in Mutual Fund Factsheet's that are uploaded every month on the websites of Asset Management Companies.


Stated Investment Horizon

Debt Mutual Fund generally specify an investment horizon, for which investors should consider investing. This is an important parameter that is sometimes overlooked by investors, who remain invested for long periods without considering the market factors. The specific investment horizon should be looked at to aim for optimum risk adjusted returns in the debt fund.


Maturity Profile

It is a graphical representation of the maturity of all holdings of the funds portfolio. It gives an over all picture as to what percentage of the funds net assets fall under different time frames, ranging from 6 months to 1 year to 3 years and so on. This helps understand what percentage of the funds assets invest in which maturity bonds, and to what extent the fund is exposed to the interest rate risk. In a falling interest rate scenario, debt funds maintain relatively higher portfolio maturities and vice versa.


The image above is representational of the maturity profile of a debt fund, as presented in a mutual fund fact sheet.


Credit Risk and Credit Rating Profile

Debt Mutual Funds can invest in securities with different credit ratings, as per the schemes investment strategy. The credit rating of the security is listed alongside its name in the mutual fund factsheet. These ratings are assigned by different rating agencies and indicate the credit worthiness of the borrower. Higher the rating, high is the creditworthiness of the borrower, although the returns may be lower as compared to a bond issued by an entity that has a lower rating. The Credit profile of the debt portfolio indicates the level of credit risk that the debt fund has assumed. A large chunk in sovereign papers or highest rating papers implies that the fund is taking lower credit risk.


The image above is representational of the rating profile of a debt fund, as presented in a mutual fund fact sheet.


Asset Allocation in Fund portfolio

This helps investors understand the investment approach of the fund manager. Debt funds invest in bonds issued by different entities and investors can identify the percentage of the fund's portfolio that is invested in the various debt instruments like government of India bonds, state government bonds, corporate debt, public sector undertaking (PSU) bonds, treasury bills, cash etc.


In a fund portfolio, one can see list of instruments that the fund has invested in. While this will vary continually with the buying or selling calls taken by the fund manager, the portfolio can be indicative of the strategy employed by the fund.


A larger exposure to Government of India securities would imply a potential for greater returns in a falling interest rate scenario (as bond prices and interest rates are inversely related). Investments in good Corporate and PSU bonds have the potential to earn higher interest income than the investments in pure government of India bonds. A certain percentage of the portfolio is also held in cash and net current assets. This is done to ensure availability of funds to meet the day-to-day redemptions of investors without having to sell securities which might affect the portfolio's performance.


Other Quantitative Indicators of debt Mutual Funds

Average maturity of the portfolio: This figure, represented in day or years, gives the average maturity of all the instruments held in the portfolio.


Duration of portfolio: The duration (not to be confused with maturity) is the measure of the price sensitivity of the portfolio to a change in interest rates. Funds with a longer duration would be more sensitive to a given change in interest rates. For example, if interest rates were to go down (or up) by 1% in a month, the Net Asset Value (NAV) of Bond fund is likely to go up (or down) by 5 per cent if modified duration of portfolio is mentioned as 5 years.


Yield: The yield is a measure of the interest income generated by the bonds in the portfolio. Funds that invest in bonds that have a higher coupon rate would have a higher portfolio yield. In a stable interest rate scenario, this can be considered as an approximate measure of the returns the fund can generate. However, in a falling interest rate scenario, this is not a true measure of the returns, as it does not account for trading gains that can accrue from the active buying and selling of bonds. The yield to maturity of a debt fund indicates the running yield of the fund. Debt funds are total return products returning both accrual of interest and mark to market gain or losses.


Other than above, investors must also look at the stated investment objective of the debt fund, its positioning in the style box, other fund features section and its performance record over a period of time vis-a vis its benchmark.


The points listed below, provide a snapshot of the parameters to consider while deciding in which Debt Mutual Fund to invest.


  • The debtfund Portfolio gives a list of the instruments the fund has currently invested in, indicative of its investment strategy.
  • Average portfolio maturity indicates the length of time until the principal amount of the bond is repaid.
  • Duration of the portfolio indicates the price sensitivity of the portfolio to a given change in interest rates; a measure of the fund's volatility.
  • Average maturity and duration fluctuate depending on the view of the fund manager for flexible and dynamic debt funds. A fund with higher maturity and duration is expected to yield better results in a falling interest rate scenario and vice versa. This is because interest rates and bond prices are inversely related and longer the tenure of the bond, the more sensitive it is to changes in interest rates.
  • The yield is a measure of the interest income earned on the bonds held in the portfolio.
  • The maturity profile of the portfolio can be used to understand the composition of the portfolio.
  • Returns can potentially enhanced by lowering credit quality of the portfolio, which enhances the credit risk. The rating profile can be used to understand the credit risk.


How to choose a Debt Mutual Fund

Our range of Debt Mutual Funds