Considering investing in debt funds? Here are some warning signs

Debt funds, which are frequently seen to be a safer bet than equity funds, have experienced credit and liquidity shocks. This necessitates keeping an eye out for warning signs before investing in debt funds. Continue reading to learn more.

Debt mutual funds, when compared to equity mutual funds, are thought to be a safer bet. However, it is implausible to term them risk-free. Debt Funds do contain risk; however, it is lower when compared to equity funds. We, in this post, have identified the chief warning signs to look out for while investing in debt funds.

Concentration in a single issuer

If the debt mutual fund is heavily weighted toward a single issuer, this is a warning sign. Investing in several securities issued by the same corporation exposes debt mutual funds to company-specific risk. And if such an organisation is unable to honour the payments, the mutual fund will be put in jeopardy. Even one or two downgrades would have an influence on the fund's overall performance.

Significant concentration in low-rated securities

To achieve better returns, debt funds typically invest in low-rated bonds. Although these products offer greater interest rates, they also involve larger credit risk. Although taking a cautious approach to them is appropriate, debt funds might overinvest in these instruments, making the whole portfolio riskier. As a result, before investing in any debt fund, ensure that you are completely informed of the risk that is assumed in exchange for the rewards that are generated.

Ratings under evaluation

Credit ratings are one of the measures that may assist you in determining the risk of certain debt security. It makes sense to keep an eye out for securities that are under evaluation by credit rating organisations. Credit rating agencies reassess the credit profiles of securities at this time and determine whether to upgrade, downgrade, or maintain the status quo. You may learn more about the effect of recent changes with the issuer. It is not, however, required to inspect every paper. Only those with a greater allocation should be checked.