Understanding Interest Rate Risk in Debt Mutual Funds

There are two ways in which an investment in a debt mutual fund grows: (1) by buying bonds with high coupon rates  and holding them until maturity. The growth in this case is by accrual of  interest. (2) by choosing long-term bonds issued by the government and aim for capital gains when the bond price increases due to decrease in interest rates.

Higher the coupon rate, lower the credit rating. Therefore the accrual strategy is subject to risk of default. Most investors do not recognize  that the accrual strategy is also subject to interest rate risk. That is, the value of the high coupon rate bonds can also change value depending on interest rate movements.

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How to Choose a Liquid Mutual Fund

Here are step-by-step instructions for choosing a liquid mutual fund. This post is inspired from a comment by Firoz Hajiani. I think the following steps might help the reader become familiar with some of the aspects that govern debt fund selection.

The first question to answer is,

Why choose a liquid fund?

Many ‘experts’ suggest that liquid funds as an alternative to a savings bank account for ‘idle money’. In my opinion, this is half-baked advice that can be misconstrued.

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Rogues Gallery: Tracking Equity Mutual Fund Performance

Here is a gallery of equity mutual fund performance track records created with the updated risk and return analyzer

The risk-return score (out of 100) with 13 risk and return metrics is calculated for different investment durations from 1 to 9 years.

Use the analyzer to determine consistency in the risk adjusted performance of the funds you are interested in.

None of the below are recommendations.

Equity Multi-cap

Templeton India Equity Income vs. BSE 200

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Update: Mutual Fund Risk and Return Analyzer

This is an update to the mutual fund risk and return analyzer which helps you gauge performance of equity mutual funds on risk-adjusted basis for investment durations ranging from the past 1 year to the past 9 years.

Nithin and Nilesh Patel pointed out that the sheet gave an error. Thanks to them, I found that the error was because of the BSE server urls. They had changed the format for some indices. This is a major disappointment as we could easily retrieve the data in the old format. Members of FB group, Asan Ideas for Wealth also helped in testing it and confirming the error.

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Investment Options for Short-term Financial Goals

Here is a list of investment options available for goals which are less than or equal to 5 years away. This is sourced out of my response to a thread at Facebook group, Asan Ideas for Wealth.

I think the first step in goal-based investing is to demarcate short-term, intermediate-term and long-term financial goals. For me,

Short-term goal </= 5 years

Intermediate-term goal 5-10 years

Long-term goal 10+ years.

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