Investing in debt mutual funds: slow and steady wins the race!

Published: May 23, 2015 at 3:52 pm

“What debt mutual should I choose as part of a long-term portfolio?”, is a question that I am often asked.   EPF,  PPF and NPS (with no equity or only 15% equity as for government employees) are the first choices when it comes to debt or  fixed income products.  This is good enough for many salaried folks far from retirement.

For people who are not part of EPF/NPS and do not like the lock-in period of PPF, debt mutual funds are a good choice. Even the salaried folk are likely to require a debt fund as they edge closer to retirement if they wish to change the equity:debt allocation.

How about those who are retired? What kind of debt mutual fund should they choose?

Although, there are several categories of debt mutual funds, the choice is simple for those who have a  well defined goal and who understand the balance between risk and reward.

Fixed maturity plans can be used, but the lock-in (min 3 years these days) implies that it should be used with care.

People like me, who prefer open-ended mutual funds, can simply use ultra short-term funds or short-term income funds which buy and hold short-term corporate bonds until maturity (known as accrual-type funds).

The modified duration – a measure of how long the fund will take to recover  from interest rate movements – will be low for these funds.

So would the average maturity period of the portfolio. These are low-risk, relatively high/reasonably high reward options with full liquidity and min exit load.

There is also a misconception that dynamic bond funds can play the interest game well, resulting in higher returns. There is no evidence of that in this, and in previous studies (more on this later).

Much of what is mentioned above is based on the previously published posts:

Choosing Debt Mutual Funds For the Long Term

Debt Mutual Fund Returns: How to expect when you are expecting!

In this post, I would like to reiterate the above with an updated set of graphs  based on 12-year annual returns data from value research.

Average portfolio maturity vs. standard deviation

The average maturity period of the portfolio tells us what kind of fund it is. Liquid funds mature in about 90 days or less. Long-term gilt funds in about 15-20 years!!

In terms of increasing maturity period (apr:

liquid funds < ultra-short term < short-term;  income; short-term gilts < medium terrm and long-term gilts



Notice that funds with low standard deviation (a measure of variation of the annual return from the average return) have low maturity periods.

Let us block funds with less than 3% standard deviation. This corresponds to a maturity period of 3Y or less.

The average maturity plotted above is the current number. We are assuming that it would not have deviated significantly in the past.

12-year CAGR vs. average portfolio maturity



This graph never ceases to astonish me.  If I had chosen a fund with low average folio maturity, I would have witnessed low fluctuations in my annual returns (1st plot), but would have got a return comparable to other fund categories which are way more volatile. So why bother. Why invest in  ‘flavour of the season’ long-term gilts funds? They are going to pare the gains made last year and perhaps this year when the interest rate cycle turns.

Why not keep it simple with ultra short-term or short-term funds?

The red box in this graph corresponds to 3Y or lower maturity – same as the first graph

Risk vs. reward



The low-risk option would have got you as much as return as the high-risk option. It can be argued that the high-risk option is not suitable for buying and holding and only for tactical calls.  Which makes them more riskier and stressful!

Those who recognise the importance of a minimalist portfolio – minimal in form, minimal in maintenance, will recognise the merits of investing in funds with low average portfolio maturity.

Ultra short-term funds or short-term income funds which buy and hold short-term corporate bonds untile maturity (known as accrual-type funds) will get the job done slowly and steadily, will full liquidity.


Register for Chennai Investor Workshop- June 14th 2015

Register for an evening with Subra( at Chennai – May 29th 205

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps