# How to Pick the Best Debt Mutual Fund?

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In the previous article, we came to know about the debt mutual funds and how it can be an ideal investment option in the current rising interest rate scenario.

In case you haven’t read that article, you can read it here.

However, if you feel like you know the basics of a debt mutual fund, and are more interested in knowing how to pick the best debt fund, then this article is for you. 😉

#### Analyzing the Fact Sheet

Let’s make the analysis steps easy and have a look at the following checklists needed to analyze a debt fund. For practical understanding and keeping the information relevant, we will take the example of the Aditya Birla Sun Life Short Term Fund, to study each factor in the checklist better.

Please open the fund fact sheet that you need to analyze the fund from here.

(To those who don’t know, the fund fact sheet includes all the information about a particular fund and a mutual fund house publishes the factsheet for each of their funds frequently.)

• All the factors mentioned below need to be analyzed in a collective manner for selecting a fund.
• There is ‘NO’ set ideal value for a particular factor. Peer comparison needs to be done for the funds of the same category, for making an investment decision.

Let’s start with our checklist to find the best debt mutual fund.

#### Modified duration

It’s the sensitivity of the bond’s prices with respect to 1% change (either increase or decrease) in interest rate in the economy. One should understand here that interest rate movement and prices of bonds have an inverse relationship.

Eg: In our fund example, modified duration is 1.73. This means that when the interest rate in the economy increases by 1%, NAV of the fund falls by 1.73% approximately.

Therefore in the current rising interest rate scenario, one should look at the fund with lower modified duration, so that the fall in the NAV value is the lowest.

#### Credit quality

It shows the quality of the overall fund by evaluating the credit quality of  the debt instruments the fund invests in. ofcourse, higher the rating, the better the fund is. Refer to below table, to know various credit ratings as given by different credit rating agencies.

Eg: in our fund example, 78% of the instruments are AAA rated (highest quality instruments) and 22% in AA rated instruments (high quality instruments). Thus the credit quality of the fund is pretty good.

1. Rolling returns: Problem with absolute returns and CAGR is that these measure point to point returns and thus can be slightly biased. Better way to measure returns is rolling returns. In a layman’s term, consider rolling returns as the returns that you would get on an average basis, if you would have invested in the fund anytime, irrespective of the market situation. Thus this is the average returns you will earn by investing in the fund without actually timing the market. Please take note, as the fund belongs to a certain type of category, that’s why it should ideally earn returns commensurate with the category. If the fund is earning way too high returns than peers, that too can be a red flag which might signal towards various negative factors contributing to such high returns.

Eg: In our fund, rolling returns for 3Y and 5Y are 7.17% and 7.35%. Peer comparison will help in better understanding of it. Also note- Returns are better than the deposits returns.

1. Assets under management [AUM] – This is the total amount of money an asset management company manages in that particular fund. This factor becomes important to analyze because lower AUM can pose problems for the fund house as they will not be able to handle high redemptions/withdrawals, particularly in the panic. Infact Franklin Templeton faced this pressure, leading to closure of its debt schemes!

Eg: in our example, the AUM of the fund is Rs 46,000 crores, which is huge and signals towards the strength of the fund.

Thus, these 4 are the important factors that you must definitely look at and understand how to interpret them. Other factors can also be used in addition to the above 4 factors like YTM, expensive ratio, launch date of the fund etc.

A summary for the analysis should work 🙂

Let us know which debt fund you will invest in 🙂

Until next time 😀

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