Debt funds

What is debt funds

  • Buying debt funds similar to giving a loan to the issuing organization. A debt fund invests in fixed generating securities like Corporate bonds, Government securities, Commercial paper, and other money market instruments.
  • In debt funds, the issuer pre-decides the interest rate you will earn as well as the maturity period. That’s why they are called fixed-income securities.

Types of debt funds:

1-Liquid fund:

  • Liquid fund is a type of debt funds.
  • A short period of time (1 day to 90 days) for investment
  • Least amount of risk.
  • It generally gives a higher return than a savings account but similar to a fixed deposit.
  • No penalty charges when we withdraw our money before the maturity date, (No exit load)
  • There return are less than equity and balanced fund.

    2. Ultrashort duration fund:

  • Ultrashort duration funds are types of debt funds
  • The ultrashort-term fund invests in fixed income instruments which are mostly liquid and short term maturities. 
  • Time horizon (Above 3 months) for investment
  • Exit load something charged.
  • Better return as compares to a liquid fund.
  • Low risk compared to the short-duration fund

    3. Short duration fund: 

  • Maturity period between a year to 3 years.
  • High liquidity in this type of debt funds
  • When we invest in short term duration fund then fund manager invests these funds into commercial paper, certificates of deposits and government securities.
  • The fund is available in both growth and dividends.
  • Before invest, in short term funds, we choose the lower exit load.
  • Good and fixed return in less period as compared to fixed deposit.
  • A lower degree of risk in the market.
  • High liquidity and easily convertible into cash.
  • High risk compares to ultra short term fund.

    4. Money market debt funds:

  • A money market fund is an open-ended mutual fund.
  • It is an open-ended scheme in debt funds.
  • These types of mutual fund investing in Treasury bills, Repurchase agreements, Commercial paper, and Certificates of deposits.
  • Cheque facility is available in the money market fund.
  • Investors having short term investment horizon of up to 1 year.
  • The money market fund gives you a higher return than saving a bank account.
  • Not suitable for medium and long term horizon.
  • Credit risk and interest rate risk occur in this type of fund.
  • The expense ratio is applied up to 1.05% by SEBI. 
  • Money market mutual funds like saving the account.

    5. Medium duration debt funds:

  • This type of mutual fund is open-ended.
  • Investment in that type of instrument whose time horizon is 3 years to 4 years.
  • A dynamic bond fund is best for this type of duration.
  • Interest rate higher compared to 5 years of bank FD.

    6. Medium to long duration fund:

  • This type of mutual fund is open-ended.
  • Investment in that type of instrument whose time horizon 4 years to 7 years.

    7. Long duration debt funds:

  • This type of mutual fund is open-ended.
  • Investment in that type of investment whose time horizon above 7 years.

    8. Credit risk fund:

  • This type of mutual fund is open-ended.
  • High risk compares to another debt fund.
  • They should invest at least 65% of total assets in a corporate bond, AA grade, and below rating.
  • High return.
  • Suitable for long term type of fund

9. Gilt fund:

  • This is also known as a government securities fund.
  • Very low credit risk. 
  • Higher interest rate.
  • Time horizon at least 3 years to 5 years.
  • Minimum 80% of total assets are invested in government securities.

  10. Gilt fund-10 years constant duration:

  • Same as a gilt fund but time horizon 10 years.

  11. Banking & PSU funds:

  • These funds are mostly invested in bank certificates of deposits or bonds/debentures or public sector companies- mostly in the AAA category.
  • Investment time horizon 12 months or more.
  • This type of debt fund to replace your bank deposits.
  • Average return up to 9%/year.
  • Low risk.

  12. Dynamic bond fund:

  • This type of fund in which the fund manager keeps changing portfolio composition according to changing the interest rate regime.
  • The objective of the dynamic bond fund is to deliver the best returns in both rising and falling market scenarios. It all depends on the fund manager’s decision and portfolio management.
  • Time horizon 3 to 5 years.
  • Moderate risk.
  • These funds generally have huge assets under management (AUM), running to a portfolio worth several thousand crores.
  • Stay away from a new fund offer (NFO) in dynamic bond funds. Choose at least 5 years old dynamic bond fund management company.
  • Average return 6%/year.

  13. Corporate bond fund:

  • A corporate bond fund is an open-ended debt fund.
  • When you buy a corporate bond. the company is actually borrowing money from you. The organization will repay the principal to you after the maturity period you agreed on. In the meantime, you will receive the interest rate (fixed income) your account known as the coupon.
  • Any can issue corporate bond fund, also called as non-convertible debenture (NCD) 
  • Coupon payment in India is generally made twice a year.
  • Long term debt funds often tend to become riskier when interest rates fluctuate beyond expectations.
  • The annual returns you make from the bond are called the current yield. For example, if the coupon rate of bond with RS 1000 per value 20% then the organization pays you RS 200 as interest per year. 
  • Invest at least 80% of its total assets in the highest corporate bonds.
  • Low-risk investment.
  • Time horizon 1 to 4 years.

  14. Overnight funds:

  • An overnight fund is an open-ended debt fund
  • The overnight fund is the component of the money market involving the shortest term loan. The lender agrees to lend borrowers funds only overnight. The borrowers must repay the borrowed fund plus the interest rate of the short of the business the next day.
  • Time horizon one day.
  • Low risk.
  • Average return 10% in seven days

15. Fixed maturity plans:

  • A fixed deposit fund is a closed-ended debt fund.
  • Only you can invest during the new fund offer ( NFO) period.
  • Low levels of the interest rate.
  • Low credit risk.
  • The time horizon for 3 years or more.
  • In case you want to redeem your FMP investment before maturity. You can do so through the stock exchange where the scheme is listed. However, the Demat account is mandatory.
  • Return not guaranteed.
  • Moderate risk.
  • The fund manager invests in the below instruments

 Government Securities (G-Secs), T-Bills (Treasury Bills), Liquid scheme units, Repo and Reverse Repo Instruments, Highly-rated NCDs (non-convertible debentures), Securitized Debt Instruments, CDs (certificate of deposits), CPs (commercial papers) and Various other cash-equivalent investments

     16. Floating rate maturity fund:

  • Floating rate mutual funds can be both open and closed-end.
  • Try to give a stable return when the market fluctuates up and down.
  • That have a variable coupon, equal to money market reference rate.
  • These funds are primarily invested in floating rate debt securities.
  • These funds are suitable for investments when interest rates in the markets are increasing.

  17. Income fund:

  • Low level of interest rate risk.
  • Generating interest income by holding the instruments until maturity.
  • Selling them in the debt market if the price of the instrument goes up high.
  • Higher returns compared to bank FD.
  • Open-ended funds
  • Lower credit risk.
  • Average return 7% to 9%.
  • Time horizon 1 to 3 years or more.

If you want to know about equity funds then you can click on the below links https://www.capitalcred.in/2020/06/23/equity-funds/

If you want to open demat and traiding account then you can open by clicking on below link

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