13 May 2016

The Debt Fund I Want

Debt funds come in many varieties, many categorised by the tenure of the underlying bonds, like liquid funds, ultra-short-term funds and short-term funds.

Liquid and ultra-short-term funds are ideal for your emergency funds.

But for other debt investments, I don’t want to pick a tenure. That’s the fund manager’s job. In fact, the fund manager should buy bonds of whatever tenure give the highest returns. So, given a choice between a 1-year bond that pays 8% and a 5-year bond that pays 9%, I’d want the fund manager to pick the 9% bond.

There’s no need to guess which way the interest rate will go. Just pick the best deal you can get as of today and move on.

A category of debt funds called dynamic bond funds have the fund manager take interest rate calls, but they don’t perform well. Instead of trying to foresee interest rate movements and failing, just buy the bonds with the highest yield as of today and move on.

This kind of fund would be simple, predictable, have higher returns, and less risk of the fund manager getting it wrong. Most importantly, they don’t require investors to do the job of the fund manager and select a tenure. Leave that to the fund manager.

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