Macaulay Duration:

• This tells about the weighted average maturity, or an approx time to maturity of current portfolio.
• Higher the duration, higher the risk from increase in interest rates.
• Ideally, your investment horizon should be similar to the fund duration.

Yield to Maturity:

• This is the expected yield for the fund duration, provided no defaults and interest rate changes.
• Eg: Fund with 6% YTM and duration of 2 years can be expected to yield 6% annual return for 2 years. This is an approx simplified estimate.
• Higher yield is better but comes with additional risk of defaults.

Portfolio Quality:

• Check for ratings of different investments in the portfolio.
• Higher AAA papers represent high paper quality and lower yield.
• Avoid funds with significant proportion of lower quality papers.

Concentration:

• Pick funds with investments in a vast quantity of papers.
• Concentration risk arises from significant % of fund in a few papers.
• It is even more enhanced in case papers are of low quality or fund size is small.

Fund Size:

• When it comes to debt investing, bigger is better. All things equal, pick funds with bigger size.
• Smaller funds will be more concentrated and hence risky Defaults and redemptions can be extremely risky.
• Defaults and redemptions can be extremely risky in small fund sizes

Summary:

• Rule-of-thumb calculation for debt funds (given no interest rate changes and defaults):

Return = YTM - Total Expense Ratio (TER)

• Higher YTM implies higher credit risk Higher duration implies higher interest rate risk.
• Avoid funds with high concentration or low fund size.

DISCLAIMER: This blog is solely for educational purposes and not to offer any investment advice. Please do your own research or consult a financial advisor before making any investment decisions.