Debt mutual funds - salient points to consider

When it comes to investing, there are primarily two classes of assets - equity and debt. Among the characteristics to differentiate them one which is frequently abided by is the year of tenure. Normally one invests in equity for the long term and debt for the short term. But due to government policies with respect to taxation and other factors suitable to it this philosophy got turned on its head in that people are comfortable with investing in debt for long term and equity for short term.

Debt is really complicated and to avoid the hassles of identifying good debt instruments of varying tenures  one of the vehicles provided to invest is debt mutual funds. Contrary to some impressions debt mutual funds carry some amount of risk (one must remember the recent Franklin fiasco), so primarily to make investors aware SEBI has classified debt mutual funds across various categories based primarily on risk and tenure. It must be borne in mind that risk is dependent on the underlying papers (whether govt. backed or corporate deposit) that mutual funds invest in with govt. backed papers having the utmost safety but bringing in less returns. Anyways when you invest in debt, capital preservation should be the prime concern rather than higher returns. For higher return equity should be the primary consideration.

Assuming that one decides to invest in debt mutual funds what are the factors to bear in mind. 

(i) tenure - every debt fund cites details of the average maturity period of the underlying period. While one may be invested in debt mutual funds for whatever duration he desires but lesser the average maturity duration (preferably less than1 year) the better.

(ii) quality of the underlying papers - As one desires to remain invested for a longer duration he would definitely expect a bit of higher interest on his investment. So in that quest he would definitely want to invest in a debt mutual fund whose average maturity duration is comparably long, in that extent the debt mutual fund would have as its underlying papers some corporate deposit papers which could comparably poor ratings. Based on one's comfort with the risk of this papers defaulting on repayment (again Franklin fiasco must be borne in mind) one should go ahead with investing.

(iii) simplicity - One should invest solely for the intention of capital preservation and a 1-2% interest rate higher than what banks offer and should avoid riskier funds like credit risk funds and the likes.

(iv) fund house - One should invest with a fund managed by reputed fund house who have been in business since the last 10 years, have an established purpose, has a dedicated fund manager for the fund and there has not been frequent change of leadership in the fund and the fund has consistently given comparatively decent returns