WHAT ARE DEBT MUTUAL FUNDS?

When companies issuing debt instruments wish to raise funds, they resort to ‘borrowing’ from investors. In return, they promise a regular and steady interest. This article will cover what are debt mutual funds and cover different types of debt mutual funds available to investos.

What is debt fund in mutual fund?

Debt mutual funds invest in securities producing fixed income such as corporate bonds, commercial papers, government securities, treasury bills, and many other money market instruments. All these instruments have a pre-decided interest rate and maturity date that an investor earns on maturity. The returns on debt funds are usually unaffected by fluctuations in the market. Hence, debt securities are considered to be low-risk investment options.

As per SEBI’s (Securities and Exchange Board of India) categorisation and rationalisation norms, there are 16 debt fund categories. Here is a list of debt-based mutual fund categories:

Overnight funds: These mutual funds invest in overnight securities that mature in a day.

Liquid funds: These funds invest in securities that have a maturity of up to 91-days.

Ultra-short durationfunds: These mutual funds are mandated to invest in money market and debt securities with a Macaulay duration between 3 to 6 months.

Low duration debt funds: These funds invest in money market and debt securities with a Macaulay duration of 6 to 12 months.

Money market funds: These mutual fund schemes invest in money market securities with a maturity of up to 1 year.

Short duration debt funds: These funds invest in money market and debt securities with a Macaulay duration of 1-3 years.

Medium duration debt funds: These mutual fund schemes invest in money market and debt securities with a Macaulay duration of 3 years to 4 years.

Medium to long duration debt funds: These mutual funds invest in money market and debt securities with a Macaulay duration of 4 to 7 years.

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

Dynamic bond funds: These funds have the liberty to invest across maturities and securities based on the outlook of the fund manager.

Corporate bond funds: These funds are mandated to invest at least 80% of their corpus is high-rated corporate bonds.

Credit risk funds: These mutual funds usually invest in below higher-rated corporate bonds. SEBI mandates these schemes to invest at least 65% of their portfolio in lower-rated corporate bonds.

Banking & PSU funds: These mutual funds invest a minimum of 80% of their portfolio in debt securities of public sector,  undertakings and public financial institutions.

Gilt funds: These funds are mandated to invest at least 80% of their portfolio in government securities across maturities.

Gilt funds with 10-year constant duration: These funds are mandated to invest at least 80% of their total assets in government securities that mature within 10 years.

You can also consult an expert who can help you manage your portfolio and invest in mutual funds online. Happy investing!