Type of Debt Funds in India

(Last Updated On: April 9, 2017)

What is a Debt Fund

Debt funds are an investment pool that invests mainly in highly rated fixed income securities like central and state government securities, corporate deposits, treasury bills, corporate bonds. These funds are managed by highly skilled professional. The overall expense ratio is lower in debt fund as compared to the equity fund, main reason for it is overall management cost is lower. There is a lock-in period for several debt funds and it is considered as the most effective tax saving option compared to traditional options like Fixed Deposits, PPF etc. As far as absolute returns are concerned, debt fund gives the higher return as compared to FD or PPF. The post lists the various type of debt funds in India.

Here is a simple video explaining Debt funds

There are different types of debt funds. Given below are broad types and different companies may call it with a different name with few changes to its characteristics.

Gilt fund

  • These are funds that mainly invests in government bond and securities. This not only include centre government securities but also state government securities.
  • As gilt funds invest in paperback securities, the default risk is almost zero. However, it should be noted that zero default risk does not mean 100% safe. There exists interest rate risk.
  • It is advisable not to hold a gilt fund for the long term as the interest rate changes are sensitive.
  • This is an open-ended fund.

Read more about Gilt funds at Gilt Funds in India

Long term Debt Funds

  • These are funds that mainly invests in long term securities which might be from the Govt and from the private sector alike
  • The funds are for investors looking for better returns in longer term i.e greater than 3 years.
  • The funds are very sensitive to the policy rate and bond market fluctuations and hence should not be invested for shorter term.
  • This is an open-ended fund.
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Short term debt funds

  • Commercial papers, certificate of deposits and bonds are most common investment avenues of short term fund. Interest rates changes do not affect such investment avenues.
  • The returns offered by such short-term funds are higher as compared to gilt fund and the returns are consistent in short term fund.
  • If an investor is having an excess amount in hand and wants to invest for 12-36 months then short term fund  could be a good option.
  • The maturity period in short term fund is longer than the liquid fund or income fund but shorter than income fund.
  • This is an open-ended fund.
  • There is subcategory called Ultra short term fund which is funds usually invest instruments having a maturity of 90 days to 1.5 years and are very less volatile.

Income Fund or Hybrid fund

  • Income funds usually invest their corpus into the entire debt instruments in the market. It could be bonds, corporate deposits, debentures and securities.
  • Income funds have a flexibility of investing its corpus to short-term instruments of 6-12 months and long term instruments of 5-10 years.
  • An investor who wants to invest for long term and is capable of taking high risk can invest in an Income fund. In the longer period, income fund tends to give higher and stable returns.
  • The perfect time to enter in Income fund is the time when interest rates have to reach to its peak and are about to reduce.
  • This is an open-ended fund.
  • Income fund is also called hybrid fund as they invest in both equity and debt in the different ratio depending upon fund manager.
READ  Short Term Debt Funds meaning, methodology, returns, risk

Fixed maturity plans

  • As the name suggest, Fixed maturity plans (FMPs) are having fixed tenure and invested in securities that matured after a certain period of time. On or before maturity period securities are redeemed and proceeds are paid to investors.
  • FMPs are close-ended fund.
  • In FMPs, interest rate risk is zero and maturity amount is predictable.
  • The NAV of FMPs will not move even if there is a change in interest rate.
  • FMPs are the product for those investors who would like to invest their funds for fixed tenure and for those who do not want to take the risk especially when interest rate trend is uncertain.
  • Ideally, FMPs are meant for a period of 3-5 years.

Liquid funds

  • Liquid fund as its name says are funds that are highly liquid and mostly invest in highly liquid money market instrument like commercial papers, treasury bills, inter-bank call money market etc.
  • Among all debt funds, returns offer by the liquid fund is most stable compared to other debt funds.
  • The liquid fund can be used as an option of savings bank account to park excess and huge amount lying in a bank account and can give you better returns than the normal bank account.
  • It is advisable that liquid funds should be held for short period of time may be few days to a month as the returns in long run are not lucrative. Even fund can be invested for a single day.
  • Returns under liquid funds are less fluctuating as compared to other debt funds.
  • The liquid fund cannot invest in instruments that have maturity of more than 91 days.
  • Liquid funds have no exit load and can be redeemed very easily.
  • This is an open-ended fund.
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Debt Funds mutual funds risk return relationship pic

Let us put all type of the debt funds from risk and return point of view ranging from lowest to highest. The first being the liquid fund which is highly liquid and very less risky, then short-term fund and income fund; after to it is income fund and lastly gilt fund. Investors have many options to chose from different types of the debt fund. He or she may choose it as per its own risk and return factors in his or her portfolio.

Hope this post was useful in giving you a round of type of Debt Funds in India. Enjoy your investments ..:) !!

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