Mutual funds are broadly classified into two types – equity and debt funds. Debt funds are considered to be less risky investments than equities. That is why several investors with low-risk profile prefer purchasing debt securities.
However, they offer lower returns as compared to equity investments. This article will cover what is debt fund in mutual fund and the different types of debt funds.
What Are Debt Mutual Funds?
Debt mutual funds are a type of mutual funds that invests in securities that generate fixed income. Common examples include corporate debt securities, corporate and government bonds, money market securities etc. Debt mutual funds are also referred to as bond funds or fixed-income funds.
What Are The Different Types Of Debt Mutual Funds?
There are different types of debt funds that cater to the different investment needs of investors. As per SEBI’s (Securities and Exchange Board of India) new categorization norms, there are 16 types of debt mutual funds. These are:
- Overnight Fund
- Liquid Fund
- Ultra Short Duration
- Low Duration
- Money Market Fund
- Short Duration Fund
- Medium Duration Fund
- Medium to Long Duration
- Long Duration Fund
- Dynamic Bond Fund
- Corporate Bond Fund
- Credit Risk Fund
- Banking and PSU Fund
- Gilt Fund
- Gilt Fund with 10-year Constant Duration
- Floater Fund
Let’s understand the most common debt-based mutual funds:
These mutual funds invest in all government debt such as bonds issued by Central Bank or state government on behalf of the central government. The investment is made on paper; hence they carry zero default risk.
However, the interest rate might remain a cause of concern. In fact, long-term gilt mutual funds are believed to be one of the riskiest funds as they are quite sensitive to changes in interest rate charges.
ULTRA-SHORT TERM FUNDS
Under these schemes, the investment is done in debt and money market securities such as certificate of deposits, commercial papers, etc.
It has a maturity period of three to six months and is not affected by changes in interest rates. Hence, the returns on these mutual fund schemes are quite consistent.
FIXED INCOME FUNDS
The mutual fund schemes invest their assets across debt instruments such as corporate debentures, bonds, and, government securities. They can also invest in securities with maturity period of 1-2 years’ time frame or even 15 to 20 years.
FIXED MATURITY FUNDS
These schemes have a fixed investment tenure. These securities invest in papers with matching maturity and are held until then. Hence, there is no interest rate risk. Even if the interest rate moves up, NAV (net asset value) is not affected.
Liquid mutual funds invest in money market instruments such as treasury bills, certificate of deposits, inter-bank call money market, and commercial papers.
The returns on these funds are more significant as compared to others. As they provide easy liquidity, it is a good substitute to bank savings account.
Debt mutual funds are ideal for those who want higher returns than traditional instruments such as recurring deposits and fixed deposits, but do not want to expose their capital to the higher risks and volatility of the share market. Happy investing!