Six smart things to know about returns from debt funds
Six smart things to know about returns from debt funds

1) Annualising returns of very short-term debt funds, such as liquid funds, helps compare their performance.
The absolute return is converted into the per annum return by multiplying by the factor '365/holding period'.

2) According to Sebi regulations, the long-term returns are disclosed as CAGR (compounded annual growth
rate). It takes into account the compounding effect on investments year after year.

3) The relative performance of the fund can be assessed by comparing it against a benchmark. Returns of
long-term debt funds must be accompanied by the returns of the benchmark as well as those of 10-year GOI
bonds.
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4) For effective evaluation, the benchmark must represent the investment objective of the fund. For
instance, it would be futile to compare the performance of an income fund vis-a-vis the Crisil Liquid Fund
Index.

5) The relevant period for evaluating returns from a debt fund depends on its investment objective and the
suitable investment horizon. For example, a liquid fund's performance may be evaluated over seven days to
three months.

6) The average maturity and duration of a debt fund helps measure the interest rate risk in the fund.
Interest rate risk causes volatility in returns of debt funds.