Those who decide to invest in mutual funds have the choice to select from a wide range of funds. Right from fixed income to balanced funds to equity to index funds, the investment opportunities are many. Yet, debt funds are the most popular pick. Do you know there are multiple types of debt funds to choose from? You can invest in income funds, liquid funds, gilt funds, short, ultra-short-term funds, etc. A debt fund generally invests in instruments such as Government securities, corporate bonds, commercial papers, etc.

But you need to see how to pick the right one for investment. This guide and tips should help you –

Investment horizon vs maturity term

Debt mutual funds are the best investment instruments for those with varying investment horizons. Some funds mature within a month while others take up to five years. Funds with three years of maturity work differently than funds that mature within a month or year. Precisely why it is crucial to ascertain your preferred investment tenure. Once you have decided how long you seek to remain invested, you can opt for the ones with the preferred term.

Investment categories

There are different kinds of debt funds to select from. After SEBI asked fund houses to re-classify all the current debt funds, 16 categories of these funds alone, were recognised. Each debt fund category was given a boundary within which different schemes could work. According to the categorisation, schemes like short duration funds, long-duration funds, and others, had limitations on investment tenure, while funds such as credit risk and corporate bond funds had restrictions on the credit ratings of specific underlying scripts. Hence, it is essential to choose the investment category wisely.

Risk appetite

Although they are considered safer than most other funds, the debt fund does have some risk attached to it as is the case with any market investment. These investment instruments, like other market instruments, are not immune to market volatility and price fluctuations. You must ask yourself what you need – returns or safety. You should determine how much you can invest and how much you can lose from the beginning. This is called defining the risk appetite. Decide how much risk you seek to take, even while investing in low-risk mutual funds.

Interest rate trend

When you decide to invest in debt mutual funds, you should consider the interest rate trend. All investors seek to earn higher returns on their investment, and hence, it is imperative you note the interest rate trend. When you notice an upward trend, consider investing in short duration funds. So, when the interest rates increase, the duration of long duration funds gets modified and higher. Similarly, you should invest in long duration funds when the interest rates decline.