Debt Funds And Their Types

Do you want to invest in mutual funds but are afraid of taking risks? Have you given debt funds any thought? In a nutshell, debt funds are mutual fund schemes that invest primarily in fixed-income securities, such as monthly income plans (MIPs), short-term plans (STPs), liquid funds, fixed maturity plans (FMPs), etc. Are you still unsure of how investing in debt funds may help you increase your wealth? Allow us to set the record straight.

For you to make an informed investment selection, we have detailed the idea of debt mutual fund schemes, their advantages, sorts, and workings in this article. Let's start now!

What are Debt Funds?

Debt funds invest in a variety of money market instruments, including corporate bonds, commercial papers, and government securities, all of which produce fixed income. The term "fixed-income securities" refers to all of these instruments that have a predetermined maturity date and interest rate that the buyer can earn on maturity. The returns are often unaffected by market movements. Debt securities are therefore viewed as low-risk investment options.

Types of Debt Funds

Debt funds can be categorised into the following categories according to their maturity period:

• Liquid Fund: A liquid fund that invests in financial securities with a maximum 91-day maturity. When making short-term investments, liquid funds are a viable option for savings accounts because they typically provide higher yields.
• Money Market Fund: This fund makes investments in financial securities with a maximum 1-year maturity. These funds are helpful for investors looking for short-term, low-risk debt instruments.
• Dynamic Bond Fund: Depending on the interest rate environment, the Dynamic Bond Fund makes investments in debt instruments with various maturities. Investors with moderate risk tolerance and a three to five-year investment horizon might consider these ETFs.
• Corporate Bond Fund: This fund makes investments in corporate bonds with the best ratings, at least 80% of its total holdings. Investors looking to invest in reputable corporate bonds and who have a reduced risk tolerance might choose these ETFs.
• Banking and PSU Fund: A minimum of 80% of the assets in the Banking and PSU Fund are allocated to debt instruments issued by banks and PSUs (public sector undertakings).
• Gilt Fund: In government securities of various maturities, the Gilt Fund must invest at least 80% of its investable capital. No credit risk exists with these funds. The risk of interest rates is substantial, nevertheless.
• Credit Risk Fund: A credit risk fund is one that makes investments in corporate bonds with ratings that are at least 65% lower than those of the highest grade. As a result, these funds have some credit risk and provide marginally higher yields than the best-quality bonds.
• Floater Fund: This type of fund must place at least 65% of its investable corpus in floating-rate securities. The low interest-rate risk applies to these ETFs.
• Overnight Fund: The Overnight Fund invests in debt instruments with a one-day maturity. Due to the low credit risk and low-interest rate risk, these funds are regarded as being exceptionally safe.
• Ultra Short Duration Fund: The Macaulay length of the Ultra Short Duration Fund's investments in debt securities and money market instruments is between three and six months.
• Low Duration Fund: The Macaulay length of the Low Duration Fund's investments in debt securities and money market instruments is between six and twelve months.
• Short Duration Fund: The Macaulay duration of the Short Duration Fund's investments in money market instruments and debt securities is between one and three years.

Medium Duration Fund: The Macaulay term of the Medium Duration Fund, which invests in debt securities and money market instruments, is between three and four years.