10,607.3555.65
Stock Analysis, IPO, Mutual Funds, Bonds & More

What are debt mutual funds?

ET Online|
Last Updated: Jun 16, 2020, 03.48 PM IST
0Comments

Summary Debt mutual funds invest in fixed income securities like bonds, government securities, Treasury bills, among others.

iStock
gold
Debt mutual funds invest in fixed income securities like bonds, government securities, Treasury bills, among others. As per Sebi's categorisation and rationalisation norms, there are 16 debt mutual fund categories. The market regulator has categorised debt schemes based on where they invest their corpus. Sebi issued comprehensive norms on categorisation and rationalisation of mutual funds in October 2018.

Debt mutual fund categories differ greatly. Some of the schemes invest in short-term securities, while some others invest in securities with long tenure. They also have varying degrees of risk. Therefore, it is extremely important for investors to choose a category that is in line with their investment horizon and risk profile.

As a rule, if you have a very low risk and do not want to take interest rate risks, you should stick to short debt schemes like liquid funds, ultra short duration funds, short duration funds, etc. Similarly, if you do not want to take too much risk, especially default risk, you should avoid investing in credit risk funds. It is better to stick to corporate bond funds and banking & PSU funds.

Here is a list of 16 different debt mutual fund categories:

Overnight funds: As the name suggest, these schemes invest in overnight securities with a maturity of a day. These schemes are suitable to ultra conservative investors looking to park money for a few days.

Liquid funds: These schemes must invest in securities with a maturity of up to 91-days. Investors can use these schemes to park money for a few days or weeks. These are one of the safest debt mutual fund option for investors.

Ultra short duration funds: These schemes have the mandate to invest in debt and money market securities with a Macaulay duration between three and six months. Macaulay duration measures how long will take the scheme to recoup the investment.

Low duration funds: These schemes invest in debt and money market securities with a Macaulay duration of six to 12 months.

Money market funds: These schemes invest in money market securities with a maturity of up to one year.

Short duration funds: These schemes invest in debt and money market securities with a Macaulay duration of one to three years.

Medium duration funds: These schemes invest in debt and money market securities with a Macaulay duration of three to four years.

Medium to long duration funds: These schemes invest in debt and money market securities with a Macaulay duration of four to seven years.

Long duration funds: These schemes invest in debt and money market securities with a Macaulay duration of more than seven years.

Dynamic bond funds: These schemes invest across durations. Simply put, they have the freedom to invest across securities and maturities based on the outlook of the fund manager. That is why these schemes are considered ideal for investors who doesn’t want to take a call on interest rates.

Corporate bond funds: These schemes have the mandate to invest at least 80% of their portfolio is highest rated corporate bonds.

Credit risk funds: These schemes invest mostly below higher-rated corporate bonds. As per Sebi, these schemes must invest at least 65% of their assets in lower-rated corporate bonds. These schemes proved to be the riskiest schemes lately, and they are witnessing massive outflows.

Banking & PSU funds: These schemes invest at least 80% of their total assets in debt instruments of banks, public sector undertakings and public financial institutions.

Gilt funds: These schemes invest in government securities across maturities. These have the mandate to invest at least 80% of their total assets in government securities.

Gilt funds with 10-year constant duration: These schemes must invest at least 80% of their assets in government securities with a maturity of 10 years.

Also Read

Don’t abandon debt mutual funds, they are important

Why debt mutual funds' liquidity may be an illusion

Should I invest in these debt mutual fund schemes?

Is it time to move money from savings accounts to debt mutual funds?

Debt mutual fund categories with minimum risk

Avoid fresh investments in debt mutual funds, for now

Comments
Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links


Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service