What are various types of debt funds?
Debt funds are a type of investment where your money is lent to the government or companies, and in return, you earn interest. These are safer than investing in the stock market because they don’t depend on share prices. However, they still carry some risks. Debt funds invest in bonds, treasury bills, and other fixed-income securities, offering predictable returns over time.
The Securities and Exchange Board of India (SEBI) has grouped debt funds into different types based on how long the investment lasts and what kind of securities they invest in. Here’s a simple explanation of the types of debt funds:
| Type of Debt Fund | Investment Period (Duration) | Invests In | Expected Pre-Tax Returns (p.a.) | Key Points |
| Overnight Fund | 1 Day | Call Money Market | 4-5% | Most liquid, safest, no exit load. Similar to savings account returns. |
| Liquid/Money Market Funds | 1-90 Days | Short-term Government securities (T-bills) | 4-6% | Highly liquid, with no exit load. Similar to savings account returns. |
| Ultra-Short Duration Funds | 3-6 Months | T-bills, Commercial Papers | 5-7% | Also called Liquid Plus Funds, no exit load. |
| Low Duration Fund | 6-12 Months | T-bills, Commercial Papers, Commercial Deposits | 5-7% | Typically, there is no exit load. |
| Money Market Fund | 0-12 Months | Money Market Instruments like CP, CD, T-Bill, CBLO | 5-7% | Usually, there is no exit load. |
| Short Duration Funds | 1-3 Years | Corporate Bonds & Debentures | 6-7.5% | Low risk, No exit load |
| Medium Duration Funds | 3-4 Years | Corporate Bonds, Debentures, Govt. Securities | 5-7.5% | Medium risk, similar to 3-year fixed deposits. |
| Medium to Long Duration Fund | 4-7 Years | Corporate Bonds, Debentures, Govt. Securities | 5-7.5% | Medium-high risk, similar to 5-year fixed deposits. |
| Long Duration Funds | 7+ Years | Corporate Bonds, Debentures, Govt. Securities | 6-8% | High risk. Returns were low recently due to rising interest rates. |
| Dynamic Bond Funds | Flexible (based on interest rate view) | All debt instruments | 7-9% | Medium-high risk, flexible with maturities based on interest rates. |
| Corporate Bond Fund | Flexible, similar to Short/Medium Duration | High-rated corporate bonds (minimum 80% of assets) | 6-8% | Medium risk related to interest rates. |
| Credit Risk Funds | Similar to Short/Medium Duration | Low-rated, high-yield corporate bonds (minimum 65% of assets) | 3-9% | Medium-low-interest rate risk, but high credit risk. |
| Banking & PSU Funds | Similar to Short/Medium Duration | Debt instruments of banks, PSUs, and public financial institutions (80% of assets) | 7-8% | Similar to corporate bond funds, but with better credit ratings. |
| Gilt Funds | Usually, > 3 Years | Government securities (minimum 80%) | 5-9% | There is a high-interest rate risk but no credit risk as the government won’t default. |
| Gilt Fund with 10-year constant duration |
10 Years | Government securities (minimum 80%) | 5-9% | There is a high-interest rate risk but no credit risk as the government won’t default. |
| Floater Funds | Similar to Short/Medium Duration | Floating-rate instruments (minimum 65%) | 6.5-8% | Interest rates adjust according to market changes. |
Debt Fund Risk Levels:
- Low Risk: Government securities (T-bills, Gilt Funds) or money market instruments (overnight and liquid funds).
- Medium Risk: Corporate bonds, credit risk funds, and dynamic bond funds.
- High Risk: Low-rated corporate bonds or funds with fluctuating interest rates.
This classification helps you choose a debt fund that matches your investment timeline, risk tolerance, and return expectations.
Investing in debt funds can be tricky, as there are different types with varying risks and returns. A mutual fund distributor helps you understand which fund suits your needs and risk tolerance. They guide you to make the best choice, ensuring you invest wisely and grow your money safely.
