When it comes to investing in mutual funds, many people think only of equity funds. Still, debt funds are an equally important option, especially for those who seek stable returns with lower risk. Debt funds primarily invest in fixed-income securities like treasury bills, government bonds, and other debt instruments. Let’s dive into the different types of debt funds and understand how they cater to various financial goals, investment horizons, and risk profiles.
Types of Debt Funds
1. Overnight Funds
Overnight funds are debt funds that invest in securities with a maturity of just one day. These funds are designed to provide liquidity and convenience rather than high returns. They are typically used by corporate treasuries or investors looking to park their money for a very short period.
2. Liquid Funds
These types of funds fund in debt securities that mature within 91 days. These funds are ideal for investors with temporary cash surpluses who need a safe place to park their money for a short period. Liquid funds offer steady returns with minimal Net Asset Value (NAV) fluctuation, making them a low-risk investment option.
3. Ultra-short Duration Funds
These funds suit those with the investment horizon of at least three months. These funds aim to generate slightly higher returns than liquid funds by investing in a mix of debt securities with short maturities. They are considered low-risk, but some ultra-short duration funds may include lower-rated bonds in their portfolio to boost yields.
4. Low-duration Funds
Low-duration funds are moderately risky debt funds that offer reasonable returns. They are designed for investors who plan to invest for six months to a year. To enhance yields, these funds may include bonds with weaker credit ratings in their portfolios. While they carry more risk than liquid or ultra-short-duration funds, they still balance risk and return for investors with a short to medium-term investment horizon.
5. Money Market Funds
Money market funds invest in debt instruments with up to one year of maturity. Due to their slightly longer duration, these funds generate returns primarily from interest income and offer some potential for capital gains.
6. Short-duration Funds
Short-duration funds invest in short—and long-term debt securities and across various credit ratings. They are recommended for investors with a horizon of one to three years.
7. Medium, Medium to Long, and Long Duration Funds
These funds cater to investors with longer investment horizons. Medium-duration funds generally invest in securities with three to four years, medium-to-long-duration funds target four to seven years, and long-duration funds hold securities with durations greater than seven years.
8. Fixed Maturity Plans (FMPs)
Fixed-maturity plans (FMPs) are closed-end debt funds that invest in securities with maturities matching the fund’s term. FMPs typically invest in low-risk, highly-rated debt and hold these securities until maturity.
9. Corporate Bond Funds
Corporate bond funds allocate at least 80% of their portfolio to corporate bonds rated AA+ or higher. These funds are designed for risk-averse investors wanting principal safety and regular income.
10. Credit Risk Funds
Credit risk funds fund at least 65% of their assets in corporate bonds rated below AA. Due to the increased risk associated with lower-rated bonds, these funds usually generate higher yields than more conservative corporate bond funds.
11. Banking and PSU Funds
These funds fund a minimum 80% of their assets in debt instruments issued by banks, PSUs(public sector undertakings), and public financial institutions.
12. Gilt Funds
Gilt funds exclusively invest in government securities (g-secs) of varying maturities. Since they are backed by the government, they carry no default risk, making them a safe investment choice.
13. Floater Funds
These funds invest at least 65% of their assets in floating-rate bonds. These bonds have interest rates that adjust periodically based on market conditions, reducing the mark-to-market (MTM) risk.
14. Dynamic Funds
Dynamic funds can invest in various types of securities with different maturity profiles. They adjust their portfolios according to market conditions, making them versatile debt fund investment options.
Wrapping Up
Debt mutual funds offer various options for investment needs, risk profiles, and financial goals. Whether you are looking for a safe place to park your money in the short term or seeking a moderate-risk investment for the medium to long term, there is a type of debt fund that can match your requirements.