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What are the different types of debt funds?

Mutual funds are broadly categorized as equity and debt funds. Equity funds are those mutual fund schemes which predominantly invest in equity and equity related instruments to generate wealth. They invest majority of their investible corpus in stocks of publicly listed companies and try to generate capital appreciation through active risk management.

A lot of people do not wish to invest in equity funds because of their high volatile nature. It is natural that people do not want to face losses by investing in a mutual fund scheme that carries a very high risk profile. In India, a majority of people depend on conventional investment avenues for their income goals. A sharp fall in interest rates over the years has left investors complaining about how these investment avenues no longer tend to their income needs. Such investors may consider shifting to debt mutual funds.

What is a debt mutual funds?

While equity schemes invest majority of their investible corpus in company stocks and other equity related instruments, a debt fund aims to generate capital appreciation by investing in debt securities and money market instruments. A debt fund may invest in bonds, corporate securities, debentures, derivatives, commercial papers, treasury bills, certificate of deposits and other debt securities.

Types of debt funds?

Market regulator SEBI (Securities and Exchange Board of India) has further categorized debt funds to allow retail investors to be able to take an informed investment decision. If you are planning on investing in debt funds to add diversification to your investment portfolio, you should know the different types of debt funds available.

Here are all the debt schemes currently offered to Indian investors –

Liquid funds – Liquid funds are open ended debt schemes which invest in debt securities that mature within 3 months.

Dynamic bond – A dynamic bond fund manager can switch between long-term to mid-term to short-term securities depending on the fund’s market performance.

Corporate bond fund – A corporate bond scheme predominantly invests in highest rated corporate bonds.

Ultra short duration fund – Ultra low duration funds invests in securities having the Macaulay duration between 3 months and 6 months.

Low duration fund – Low duration fund invests in debt securities such that the average maturity duration of the portfolio is between 6 months to 12 months.

Overnight fund – An overnight debt fund invests in debt securities that mature in just 24 hours.

Money market fund – A money market fund is an open ended debt scheme that invests in money market instruments such as high credit rating debt-based securities, commercial paper, treasury bills, etc.

Short duration fund – Short duration fund is an open ended short term debt scheme which invests in marketable securities with Macaulay duration between 1 year and 3 years.

Medium duration fund – Medium duration funds invests in debt and debt related instruments such that the average maturity of the portfolio is between 3 years and 4 years

Medium to long duration fund – A medium duration fund is an open ended debt scheme which invests in debt securities such that their Macaulay duration between 3 years and 4 years.

Long duration fund – A long duration fund is an open ended debt scheme whose investment portfolio has an average maturity of 7 to 10 years.

Gilt fund – A gilt fund is an open ended debt scheme that invests majority of its investible corpus in government backed securities.

Floater fund – A floater debt fund must invest a minimum of 65 per cent of its investible corpus in floating rate debt instruments.

Credit risk fund – A credit risk fund is an open ended debt scheme that invests a minimum of 65 per cent in corporate bonds of the total assets.

Banking and PSU fund – Of its total assets, a banking and PSU funds at least 80 percent in debt instruments of banks, public sector undertakings, and public financial institutions.