Debt Mutual Fund

Debt mutual funds are investment funds that primarily invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, and money market instruments to generate regular income and preserve capital with relatively lower risk compared to equity funds. They suit conservative investors looking for stable returns with moderate risk.

Types of Debt Mutual Funds

Based on Maturity Period

  • Overnight Funds: Invest in securities with a one-day maturity, offering extremely low risk and high liquidity.

  • Liquid Funds: Invest in money market instruments maturing up to 91 days. Ideal for short-term parking of funds with low risk.

  • Ultra Short Duration Funds: Invest in securities with maturities between 3 to 6 months, suitable for low-risk investors aiming for better returns than savings deposits.

  • Short Duration Funds: Invest in instruments with 1 to 3 years of maturity, balancing risk and returns for short-to-medium term horizons.

  • Medium Duration Funds: Invest in securities with 3 to 4 years maturity, targeting moderate risk and returns.

  • Medium to Long Duration Funds: Investments with maturities from 4 to 7 years, suitable for long-term investors with moderate to high risk appetite.

  • Long Duration Funds: Focus on securities with maturities of 7 years or more, carrying higher interest rate risk but potentially higher returns over the long term.

Based on Credit Quality and Issuer Type

  • Gilt Funds: Invest exclusively in government securities with minimal credit risk but sensitivity to interest rates.

  • Corporate Bond Funds: Invest mainly in high-rated corporate bonds, aiming for better yields with moderate risk.

  • Credit Risk Funds: Invest in lower-rated corporate bonds, carrying higher risk but aiming for higher returns to compensate.

  • Banking and PSU Funds: Focus on debt from banks and Public Sector Undertakings, balancing safety and moderate returns.

Based on Investment Strategy

  • Dynamic Bond Funds: Adjust portfolio duration based on interest rate movements to manage risk and optimize returns.

  • Fixed Maturity Plans (FMPs): Closed-ended funds investing in debt instruments maturing on the same date, offering predictable returns.

Key Benefits

  • Provide capital preservation and steady income.

  • Lower volatility than equity funds, suitable for risk-averse investors.

  • Good liquidity with quick redemption options.

  • Potential tax efficiency compared to fixed deposits when held long term.

Debt mutual funds can cater to diverse investment goals across different time horizons and risk profiles, making them an essential component of a balanced investment portfolio.