Check These 10 Quantitative Factors While Selecting Debt Mutual Funds

Investing in debt mutual funds is a strategy many investors use to achieve stable returns and manage risk. 

Unlike equity mutual funds, which primarily invest in stocks, debt funds invest in bonds and other fixed-income securities. 

Selecting the right debt mutual fund requires careful consideration of various quantitative factors that assess the fund's potential risk and return. 

Here are the top 10 quantitative factors investors should consider when choosing debt mutual funds:

Credit Rating: 

Evaluate the credit ratings of the securities in the fund’s portfolio. Higher-rated securities (AAA, AA) are generally safer, whereas lower-rated securities (BB, B) offer higher yields but come with greater risks.

If you are looking to generate above average returns from your debt funds, then you must tolerate a significant allocation to lower-rated bonds.

Interest Rate Sensitivity: Consider the fund’s duration and average maturity to understand how sensitive it is to interest rate changes. Funds with longer durations are more volatile and sensitive to interest rate changes.

However, if you are banking on the fact that the interest rate will fall during your investment period, it may be a prudent choice to invest in funds with higher duration/maturity.

Yield to Maturity (YTM): This metric provides the expected return on the fund if all securities in the portfolio are held until maturity, accounting for interest payments and capital gains or losses.

Expense Ratio:

As with equity funds, the expense ratio is crucial as it eats into the fund's returns. Lower expense ratios are preferable, especially for debt funds where returns can be lower than equity funds.

However, expense ratio should not be a ‘make-or-break’ factor. A low expense ratio is good but a moderate/high expense ratio isn’t necessarily bad.

Historical Performance:

Analyze the fund’s historical performance across different interest rate cycles to gauge how it has managed risk and delivered returns over time.

Asset Under Management (AUM):

The size of the fund can affect its liquidity and performance. Larger funds may have better liquidity and lower costs but may be less nimble in adjusting portfolio holdings.

Portfolio Turnover Rate:

This indicates how frequently the fund's holdings are traded. A lower turnover rate suggests a buy-and-hold strategy, which can lead to lower transaction costs and tax efficiency.

However, some funds with shorter duration will have a high portfolio turnover rate because the securities mature quickly and need to be replaced multiple times a year.

Modified Duration:

This measures the price sensitivity of a bond fund to changes in interest rates. A higher modified duration indicates greater sensitivity and potential for volatility in response to interest rate changes.

Sector Allocation:

The distribution of assets across different sectors, such as government securities, corporate bonds, and municipal bonds, can impact the fund's risk and return profile.

It is important to understand the rules that debt funds are governed by when it comes to issuer allocation.

Fund Manager’s Track Record:

The expertise and performance history of the fund manager are critical, especially in debt funds where strategic buying and selling of securities can significantly impact returns.

Understanding these quantitative factors provides a solid foundation for comparing and selecting debt mutual funds.

How to research debt mutual funds quantitatively?

On Dezerv’s website that’s optimised for mutual fund research!

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You can research mutual funds based on 100+ quantitative factors that Dezerv has made available on its mutual fund discovery and research platform.

Visit the Dezerv website and retrieve information on any mutual fund scheme that you want to research about.

Researching before investing in mutual funds is essential especially for DIY investors who don’t have professional guidance.

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