One thing we’ve noticed over the years is investors spend a lot of time analyzing equity mutual funds and not enough time on debt funds. Just like equity funds, most investors pick funds based on star ratings, past returns or recommendations on finance news sites. This is a terrible idea because, all star ratings are based on past performance: higher the past returns, more the number of starts. The problem is, unlike equity funds, higher returns in debt always equals high risk. The only real way to generate high returns in debt is by investing in riskier bonds. So picking debt funds based on start ratings and past returns is a bad idea.
The best way to choose debt funds is to understand the key risks in debt. Once you understand the risks, choosing debt funds, is really easy. In this video, Karthik explains the key data points and risks you should know when analyzing debt mutual funds:
Read these chapters to learn more about debt funds: