How to read a Debt Fund’s Monthly Fact Sheet…

Many investors do understand the benefits of reading the fact sheet of an equity fund. The equity fund contains variables like portfolio mix and returns that can be easily understood. But most MF investors do not see the point in focusing on reading the fact sheet of an income fund / debt fund. Actually, you must spend time reading the fact sheet of your debt fund holdings too on a monthly basis. Contrary to popular belief, debt funds also carry a variety of risks like default risk, interest rate risk, duration risk etc. A quick understanding of the fund fact sheet of a debt fund will help you appreciate these nuances better.

Focus on Safety…

The fact is that you are in a debt fund for the safety that debt offers. Hence it is essential to look at the portfolio and convince yourself that the debt portfolio has an element of safety built into it. For example, in a debt fund you want to see an exposure of over 80% in government securities. In case of non-GSEC investments you need to look at the issuers and the credit rating assigned by the rating agencies. Bonds issued by premium companies, PSU companies and banks carry lower risk compared to mid-cap companies. We saw that risk play out in the case of J P Morgan Fund which had a huge exposure to the bonds of Amtek Auto. You will be more comfortable if a chunk of your non-GSEC investments are AAA rated or equivalent and only a small component is AA rated. It is not too gratifying to see your fund manager going down the rating curve in search of higher returns.

Watch out for liquidity of the fund…

This is in a way an extension of the previous argument. For example, GSECs are highly liquid due to a robust secondary market. However, many bonds of institutions and companies can be quite illiquid. This is more so in case of mid-cap companies and companies with lower credit rating. As we saw in the case of Amtek a few months ago, the debt can suddenly turn illiquid resulting in a spike in yields and a fall in bond prices. This can result in steep losses for the mutual fund investor.

Yield to maturity of the fund…

The yield to maturity of the fund is also disclosed on a monthly basis. While variations on a monthly basis are understandable, you need to look at returns of the fund vis-a-vis the benchmark index which is normally the CRISIL Composite Bond Fund Index. If the fund is consistently underperforming the benchmark, then it is a cause of worry as the fund manager is not justifying the higher risk that you are taking. You need to take corrective action and compare returns of other similar funds and take a switch decision. 

Focus on the average maturity and duration of the fund…

Remember; average maturity and average duration are two different things altogether. Duration is the weighted average maturity after considering that a part of the payback starts in the form of interest payment at periodic intervals. Hence the duration of the bond will always be lower than the average maturity of the bond. However, in case of a deep discount bond the duration and the maturity will be equal. But the purpose of understanding the role of duration is something different here. You need to understand duration from the perspective of the fund manager’s view on interest rates. Let us explain!

If the fund manager believes that the rates are likely to go down he will increase the average duration of the fund and if he believes that the rates are likely to go up then he will reduce the average duration of the fund. You must quickly compare the average duration of your fund with the other similar peer group funds in the market. The last thing that you want is to get caught in low duration when rates are falling and in high duration when rates are raising.

Understanding debt markets is hardly rocket science. Concepts like yield to maturity, duration and maturity are fairly simple concepts. A quick a cursory reading of your debt fund fact sheet can throw interesting insights for you and in the process help you make a more informed and intelligent investment decision.

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One thought on “How to read a Debt Fund’s Monthly Fact Sheet…

  1. The importance of reading fact sheet for mutual fund is rightly explained. Many investors like me are very curious to read the fact sheet and understand the hidden information in it. Simple concepts such as maturity and duration are very important in reading fact sheets. Liquidity factor in the fund is well explained.


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