What Are Debt Mutual Funds?
Debt mutual funds, also known as income funds, primarily invest in fixed-income securities such as bonds, treasury bills, government securities (G-Secs), debentures, commercial papers, and certificates of deposit. These funds are ideal for conservative investors seeking stable returns with lower risk compared to equity funds.
Key Benefits of Debt Mutual Funds:
- Capital Preservation – Lower volatility than equity funds.
- Regular Income – Ideal for investors seeking steady returns.
- Liquidity Options – Some funds offer easy withdrawals (e.g., liquid funds).
SEBI Debt Fund Categories
SEBI has classified debt mutual funds into distinct categories based on maturity, risk, and investment strategy. Here’s a breakdown:
| Category | Rational |
|---|---|
| Overnight Fund | Overnight securities having maturity of 1 day |
| Liquid Fund | Debt and money market securities with maturity of upto 91 days only |
| Ultra Short Duration Fund | Debt & Money Market instruments with Macaulay duration of the portfolio between 3 months - 6 months |
| Low Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration portfolio between 6 months- 12 months |
| Money Market Fund | Investment in Money Market instruments having maturity upto 1 Year |
| Short Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 1 year - 3 years |
| Medium Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of portfolio between 3 years - 4 years |
| Medium to Long Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 4 - 7 years |
| Long Duration Fund | Investment in Debt & Money Market Instruments with Macaulay duration of the portfolio greater than 7 years |
| Dynamic Bond | Investment across duration |
| Corporate Bond Fund | Minimum 80% investment in corporate bonds only in AA+ and above rated corporate bonds |
| Credit Risk Fund | Minimum 65% investment in corporate bonds, only in AA and below rated corporate bonds |
| Banking and PSU Fund | Minimum 80% in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds |
| Gilt Fund | Minimum 80% in G-secs, across maturity |
| Gilt Fund with 10 year constant Duration | Minimum 80% in G-secs, such that the Macaulay duration of the portfolio is equal to 10 years |
| Floater Fund | Minimum 65% in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/ derivatives) |
Which Debt Fund is Right for You?
- Short-Term Goals (1-3 years): Liquid funds, ultra-short duration funds.
- Medium-Term Goals (3-5 years): Corporate bond funds, banking & PSU funds.
- Long-Term Goals (5+ years): Gilt funds, dynamic bond funds.
- Risk-Tolerant Investors: Credit risk funds (higher returns, higher risk).
- Risk-Averse Investors: Overnight funds, government securities (Gilt funds).
Conclusion
Debt mutual funds offer a balanced approach to wealth creation with lower risk. By understanding SEBI’s categorization, investors can choose funds that align with their financial goals and risk appetite.
Ready to invest? Consult a financial advisor to pick the best debt fund for your portfolio!
