How to analyse past performance of debt funds

When you put your money into a debt fund, you want to see it grow. You don’t want any unexpected surprises or suboptimal returns, right? To avoid such shocks, checking the track record of a fund matters. Think of it like reading reviews before booking a luxurious hotel for a family. After all, you are spending your hard-earned money. So, just as you would check the ratings, cleanliness, and service of a hotel, you would check how a debt fund has done over time. This tells you if the fund has performed well, met its goals, and stayed true to its objectives.

Discussed below are simple yet effective ways to analyse past performance of debt mutual funds. This will help you make smart and practical choices for a worry-free financial future.

  • Look at historical returns

The first thing to do is examine the historical returns of the fund. Most financial websites and the fund’s own site will offer data on 1-year, 3-year, 5-year, and since-inception returns. While past performance does not fully predict future results, it gives you an idea about how the fund has performed over different market conditions.

  • Check out returns’ consistency

Higher returns often lure investors. But in debt funds, stability matters. Checking for consistency in returns offers you a reliable measure of how stable a fund has been over time. If you look at returns spanning three to five years and notice stability, this suggests less risk. Unpredictable returns can be a red flag.

For example, if a debt fund posted a 9% return one year, a 2% return another year, and 7% the next, that’s erratic. Such fluctuations could indicate high-risk investments in the portfolio or poor management. Opt for funds that have shown more stable returns over the years. Stability often equates with less stress for you as an investor.

  • Assess the credit quality of the fund

Debt funds with higher ratings like AAA signal low risk, while lower ratings hint at potential risks. By examining the historical credit ratings of a debt fund’s holdings, you can gauge its past performance in terms of risk and returns. For example, a debt fund that consistently holds AAA-rated bonds is likely to have had stable returns with low default risk in the past.

This doesn’t mean you should avoid all funds that hold lower-rated bonds. These funds could offer higher returns but also expose you to greater risk. So, try to balance your comfort with risk while choosing a debt fund.

  • Compare the debt fund with its benchmark

Comparing a debt fund with its benchmark remains a crucial step in analysing its performance. Mutual funds in India set themselves against a benchmark. These benchmarks help in understanding how well or poorly the fund fares in a given period.

For instance, if a debt fund you are considering for investment mimics the performance of a government bond index, that index becomes your benchmark. The aim of the fund should be to match or exceed the returns of this index.

Ending notes

You may have researched what is a debt fund and its benefits, but before you invest, make sure to evaluate its past performance. While past results don’t guarantee future gains, they offer a helpful roadmap. Don’t just trust numbers, always weigh the risks, read reviews, and gather opinions. Talk to an advisor as they may spot details about debt funds you might miss. They can assess your goals, risk-taking capability, financial responsibilities, personal preferences and offer personalised advice. This way, you can create a well-structured portfolio with debt funds that align with your long-term financial goals and objectives.

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