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    What are debt mutual funds?

    Synopsis

    Debt mutual funds invest in fixed income securities like bonds, government securities, Treasury bills, among others.

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    Debt mutual funds invest in fixed income securities like bonds, government securities, Treasury bills, among others. As per Sebi's categorisation and rationalisation norms, there are 16 debt mutual fund categories. The market regulator has categorised debt schemes based on where they invest their corpus. Sebi issued comprehensive norms on categorisation and rationalisation of mutual funds in October 2018.

    Debt mutual fund categories differ greatly. Some of the schemes invest in short-term securities, while some others invest in securities with long tenure. They also have varying degrees of risk. Therefore, it is extremely important for investors to choose a category that is in line with their investment horizon and risk profile.

    As a rule, if you have a very low risk and do not want to take interest rate risks, you should stick to short debt schemes like liquid funds, ultra short duration funds, short duration funds, etc. Similarly, if you do not want to take too much risk, especially default risk, you should avoid investing in credit risk funds. It is better to stick to corporate bond funds and banking & PSU funds.

    Here is a list of 16 different debt mutual fund categories:

    Overnight funds: As the name suggest, these schemes invest in overnight securities with a maturity of a day. These schemes are suitable to ultra conservative investors looking to park money for a few days.

    Liquid funds: These schemes must invest in securities with a maturity of up to 91-days. Investors can use these schemes to park money for a few days or weeks. These are one of the safest debt mutual fund option for investors.

    Ultra short duration funds: These schemes have the mandate to invest in debt and money market securities with a Macaulay duration between three and six months. Macaulay duration measures how long will take the scheme to recoup the investment.

    Low duration funds: These schemes invest in debt and money market securities with a Macaulay duration of six to 12 months.

    Money market funds: These schemes invest in money market securities with a maturity of up to one year.

    Short duration funds: These schemes invest in debt and money market securities with a Macaulay duration of one to three years.

    Medium duration funds: These schemes invest in debt and money market securities with a Macaulay duration of three to four years.

    Medium to long duration funds: These schemes invest in debt and money market securities with a Macaulay duration of four to seven years.

    Long duration funds: These schemes invest in debt and money market securities with a Macaulay duration of more than seven years.

    Dynamic bond funds: These schemes invest across durations. Simply put, they have the freedom to invest across securities and maturities based on the outlook of the fund manager. That is why these schemes are considered ideal for investors who doesn’t want to take a call on interest rates.

    Corporate bond funds: These schemes have the mandate to invest at least 80% of their portfolio is highest rated corporate bonds.

    Credit risk funds: These schemes invest mostly below higher-rated corporate bonds. As per Sebi, these schemes must invest at least 65% of their assets in lower-rated corporate bonds. These schemes proved to be the riskiest schemes lately, and they are witnessing massive outflows.

    Banking & PSU funds: These schemes invest at least 80% of their total assets in debt instruments of banks, public sector undertakings and public financial institutions.

    Gilt funds: These schemes invest in government securities across maturities. These have the mandate to invest at least 80% of their total assets in government securities.

    Gilt funds with 10-year constant duration: These schemes must invest at least 80% of their assets in government securities with a maturity of 10 years.

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    2 Comments on this Story

    Bk Mittal52 days ago
    Wrong. We can see what happened in Franklin debt fund in which 30000 cr. Held up by Franklin and no action has been taken by SEBI. I would suggest all the investors to be careful about their hard earned money
    Srinivasan Vedantam57 days ago
    Debt mutual funds should declare dividend based on pooled asset every year before September and in no case allowed to reinvest in units Fresh subscriptions may be requested from investors after paying dividends. Dividends to be made tax free in the hands of fund as a deductible expense while investors will load I their income. The same procedure may be adopted for equity funds as well and aitomatic reinvestment based on NAV to be discouraged while dividends to be paid in cash every year to investors and let investors decide on where to re invest.
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