Debt Mutual Funds- Types and Benefits

Every investor’s portfolio should have two components. One that contributes to the growth of the portfolio while the second that provides stability. While the portfolio’s growth is contributed by investing in equity funds, stability is traditionally provided by investing in fixed income securities like fixed deposits (FDs). Debt mutual funds can be an alternative to the fixed deposit needs of investors. Debt mutual funds can provide liquidity and stability to your portfolio.

Debt Mutual Funds invest their money in fixed income securities like government bonds, corporate debentures, government securities, money market instruments etc. These are less risky as compared to equity and hybrid funds. Based on the maturity period, they are classified into the following types:

1. Overnight Fund– These funds invest in debt instruments, having a maturity of 1 day.
2. Liquid Fund– These funds invest in debt and money market instruments with a maturity of up to 91 days only. They are good alternatives for cash in the bank’s savings account as they give slightly more returns than the interest in the bank’s savings account. Its main purpose is temporary cash management, i.e. it is better to keep cash in liquid funds than keeping in the bank’s savings account. They provide good liquidity, i.e. you can withdraw money any time after 7 days without any charges.
3. Ultra Short Duration Fund– These funds invest in debt and money market instruments whose Macaulay duration (weighted average duration) of the portfolio is between 3-6 months.
4. Low Duration Fund- These funds invest in debt and money market instruments whose Macaulay duration of the portfolio is between 6-12 months.
5. Money Market Fund– These funds invest in money market instruments having maturity up to 1 year.
6. Short Duration Fund– These funds invest in debt and money market instruments whose Macaulay duration of the portfolio is between 1-3 years.
7. Medium Duration Fund– These funds invest in debt and money market instruments whose Macaulay duration of the portfolio is between 3-4 years.
8. Medium to Long Duration Fund– These funds invest in debt and money market instruments whose Macaulay duration of the portfolio is between 4-7 yrs.
9. Long Duration Fund– These funds invest in debt and money market instruments whose Macaulay duration of the portfolio is greater than 7 years.
10. Dynamic Bond Fund– These funds invest in bonds across the varying duration, i.e., 1-year, 5-years, 10-years, or any maturity period.
11. Corporate Bond Fund– These funds invest a minimum of 80% of total assets in corporate bonds having the highest ratings. It should be minimum AA+ and above.
12. Credit Risk Fund– These funds invest a minimum of 65% of total assets in corporate bonds having ratings below the highest quality bonds, i.e. AA, A, BBB etc.
13. Banking and PSU Fund– These funds invest at least 80% of total assets in bonds of Banks, Public Sector Undertakings (PSU), Public Financial Institutions, and Municipal Institutions.
14. Gilt Fund– These funds invest a minimum of 80% of total assets exclusively in Government Securities across varying maturities. Government securities have no default risk, or we can say zero risks. The Net Asset Value (NAV) of these funds fluctuate due to a change in interest rates and other economic factors. The returns of these funds are also less.
15. Gilt Fund 10-year Constant Duration Fund– These funds invest a minimum of 80% of total assets in Government Securities whose Macaulay duration of the portfolio is 10 years.
16. Floater Fund– These funds invest a minimum of 65% of total assets in floating rate instruments.

Also Read-

• Equity Mutual Funds- Meaning, Types and Benefits