What are the Strategies used in Debt Funds?


Debt funds are the mutual fund that will ultimately help you to invest largely in debt instruments. Some of the prominent debt instruments include the corporate debt, government securities, or bonds. The debt instruments are likely to be issued under the guidance of the government, government agencies, corporations, and even by the private companies. Like with all types of investments, debt funds are also subject to the market risks, and the most prominent risks which affect the value of debt funds include interest rates, exchange rates, inflation, besides the banking policies of the central bank.
It would not be wayward statement to write that debt funds are also sensitive to weakening of credit rating of the issuer and this is especially in the case of non-government debt. As an investor, you should be completely aware of the prominent risks factors involved in debt funds prior and plan put modern and easy to go strategies. Once the investor puts forth right strategies in place with the debt funds, things will work according to their benefits.
If you are seriously thinking on making the investments in the debt funds, probably, you should look forward to bonds, commercial papers, certificates of deposit and treasury bills. Such types of instruments are safer than if you are directly investing into the equities, but then again, these are not completely free from market risks by any means. With the basic information on the debt funds and investment strategies in place, let’s discuss on the prominent strategies for investing in the debt funds.
Strategy - 1
Duration Management- It is in fact a reliable debt management strategy which actually involves the process of altering the average duration of bonds for the prospects of investing. Duration is defined as the calibration of sensitivity of any kind debt instrument, with regard to the changes in interest rates. In general, the trend would mean that more is the duration, greater will be the sensitivity, and vice versa.
Strategy - 2
Credit Selection- This type of debt fund strategy brings in the confidence in the investor to make the investment in debt instruments in the expectation of deviations in their credit rating. In the situation where there is an increase in the credit rating of the debt instrument will give rise in its price and as the result of which there are for the enhance of the returns. Here in this strategy, the role of fund manager is very important as he will analyze the credit quality of the debt instrument before you actually move forward and invest.
Strategy - 3
Buy and Hold- Buy and Hold is also known as the passive debt management strategy and is undertaken under the professional guidance of the fund manager. The fund manager will guide investor to invest in the high yielding debt securities and holds them until the maturity period. This strategy will hold well for as long as the interest rates will remain stable. In case the interest rates increase the net asset value (NAV) will be seriously affected.