How to Analyse Performance of a Debt Mutual Fund?
Debt mutual funds are one of the most popular investment options among conservative investors who prefer a low-risk investment avenue that generates a steady income stream These funds invest in fixed-income securities such as bonds, government securities, and money market instruments, which provide regular interest income The returns generated by debt mutual funds are generally lower than equity funds, but they are also less volatile and offer more stability
However, analysing the performance of debt mutual funds can be challenging. Unlike equity mutual funds, which are valued based on the performance of underlying stocks, debt mutual funds are valued based on the performance of the underlying fixed-income securities
This blog will help you analyse the performance of debt mutual funds and make informed investment decisions to invest business cash and otherwise By following the steps outlined, you can evaluate the performance of debt mutual funds and select the ones that align with your corporate goals and risk appetite
Understand the Fund’s Objective
The fund’s objective is an essential factor to consider while analysing the performance of a debt mutual fund The fund’s objective is a statement that describes its investment strategy and goals It outlines the type of debt instruments the fund invests in, the duration of the securities held in the portfolio, and the credit quality of the securities.
Understanding the fund’s objective is crucial as it helps determine its suitability For instance, if you are scouting for a low-risk investment option with a short-term investment horizon, you may consider a debt mutual fund that invests in high-quality, short-term fixed-income securities such as liquid funds
On the other hand, if you are willing to take on more risk to achieve higher returns, you can invest business money in credit risk funds
The fund objective also provides information on the fund manager’s investment style Some fund managers may follow an active investment strategy, while others may follow a passive investment strategy Active fund managers aim to outperform the benchmark index by selecting securities that they believe will perform better than the overall market, while passive fund managers aim to replicate the benchmark index by investing in the same securities
Review Historical Returns
Historical returns provide an insight into how the fund has performed in different market conditions over a period of time It helps you evaluate the consistency of the fund’s performance While reviewing the fund’s historical returns, it is essential to consider returns over different time horizons, such as 1 year, 3 years, and 5 years. This is because the performance of a debt mutual fund may vary over various market cycles Evaluating returns over multiple periods will provide a better understanding of its performance
Compare the fund’s returns to its benchmark index to assess its performance relative to the market It is important to note that past performance does not guarantee future results While reviewing the historical returns, you should also consider other factors such as the economic environment, interest rates, and credit quality of the securities held in the portfolio. These factors can significantly impact the fund’s future performance
Analyse Risk-adjusted Returns
It is vital to factor in not only the returns generated by the fund but also the level of risk taken to achieve those returns Returns alone do not provide a complete picture of the fund’s performance, as they may be generated by taking on higher levels of risk. Therefore, it is essential to evaluate the risk-adjusted returns of the fund
The Sharpe ratio is a commonly used metric to analyse the risk-adjusted returns of a debt mutual fund. It measures the fund’s excess return over the risk-free rate per unit of volatility. The risk-free rate is the rate of return that you can earn without taking on any risk, such as investing in government bonds
A higher Sharpe ratio indicates that the fund has generated higher returns for the level of risk taken, and, therefore, has better risk-adjusted performance
Along with Sharpe ratio, commonly used metrics include the Sortino and Treynor ratios. The Sortino ratio gauges the risk-adjusted return of the fund based on the downside risk, i e , the risk of not achieving the minimum required return It considers only the negative volatility of returns, as investors are typically more concerned about downside risk.
A higher Sortino ratio indicates better risk-adjusted performance On the other hand, the Treynor ratio measures the risk-adjusted return of the fund based on the systematic risk, i e , the risk of fluctuations in the market. It compares the excess return of the fund over the risk-free rate with the beta of the fund, which measures the fund’s sensitivity to market fluctuations A higher Treynor ratio indicates better risk-adjusted performance
Evaluate Credit Quality
Credit quality is the creditworthiness of the issuer of the debt instrument, which indicates the likelihood of default Higher credit quality debt instruments are issued by entities with a lower risk of default, such as the government or blue-chip companies
You should evaluate the portfolio’s credit quality and determine whether it aligns with your investment objectives and risk appetite For instance, if you are risk-averse and are looking for a low-risk investment option, you may prefer a debt mutual fund that invests in higher credit-quality debt instruments Conversely, if you are willing to take on higher risk for higher returns, you may consider a debt mutual fund that invests in lower credit quality debt instruments
Evaluate the Fund Manager’s Experience and Expertise
The fund manager is a key factor that determines the success of a debt mutual fund The manager’s experience, expertise, and investment approach can significantly impact the fund’s performance Evaluating the fund manager’s track record is essential to understanding his/her investment style and approach By reviewing the manager’s past performance, investors can evaluate their ability to manage risk, generate consistent returns, and adjust to changing market conditions.
The fund manager’s experience is also essential as they need to navigate through various market cycles and economic conditions. An experienced fund manager can provide stability to the fund during challenging market conditions and generate better returns in the long-term
Summing it Up
In conclusion, analysing the performance of a debt mutual fund requires a holistic approach that considers the fund objective, historical returns, risk-adjusted returns, credit quality, portfolio diversification, among others By considering these factors, you can make informed investment decisions and build a well-diversified investment portfolio.
For businesses looking forward to investing idle business cash in debt funds you can try Shootih – India’s first business wealth management platform Shootih offers you a gamut of debt mutual funds to invest as per your choice and risk appetite.
Disclaimer: Mutual funds are subject to market risks, read all scheme-related documents carefully.
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website
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