Securities and Exchange
Board of India (SEBI) formulates policies and regulates the mutual funds in
India. SEBI has issued a circular in October
2017 on categorization and rationalization of mutual funds schemes.
As per SEBI’s categorization and rationalization norms, the debt funds schemes are divided into 16 categories. In this post, let’s take a look at the new debt funds categories.
As per SEBI’s categorization and rationalization norms, the debt funds schemes are divided into 16 categories. In this post, let’s take a look at the new debt funds categories.
What is Debt Fund?
Debt funds are mutual funds
schemes that invest in highly rated fixed income generating securities like government
bonds, RBI bonds, corporate bonds, and other money market instruments that
offer capital appreciation.
Debt funds pool money from the public and invest this money in highly rated fixed income generating securities with low risk.
Debt funds pool money from the public and invest this money in highly rated fixed income generating securities with low risk.
Suitability of Debt Funds
Debt funds are best suited
for conservative investors who do not want to invest in the highly volatile
equity fund market. These funds are less volatile and, hence, are much safer as
compared to equity mutual funds.
They provide steady returns with low volatility but the returns are less when compared with the returns of equity mutual funds.
They provide steady returns with low volatility but the returns are less when compared with the returns of equity mutual funds.
Types of Debt Funds
There are 16 categories
under debt schemes that a mutual fund company can have. Debt schemes are categorised
according to where they invest their corpus. Below are the new debt schemes
1. Overnight Fund
These schemes are open-ended debt schemes investing in overnight
securities having maturity of 1 day.
2. Liquid Fund
These schemes are open-ended liquid schemes. These funds invest in
debt and money market securities with maturity
of up to ninety-one days only.
3. Ultra Short Duration Fund
These schemes are open-ended ultra-short term debt schemes. Invest
in debt and money market instruments with a maturity between three months and
six months.
4. Low Duration Fund
These are low duration debt
schemes investing in debt and money market instruments with Macaulay duration of
the portfolio is between six and twelve months.
5. Money Market Fund
Open-ended
debt schemes investing in money market instruments having maturity up to one
year.
6. Short Duration Fund
These short-term debt schemes invest in debt and
money market instruments with duration between
one and three years.
7. Medium Duration Fund
These medium-term debt schemes invest in debt and
money market instruments with duration between
three and four years.
8. Medium to Long Duration Fund
These funds are medium-term debt scheme invest in debt and
money market instruments with duration between
four years and seven years.
9. Long Duration Fund
These debt schemes invest in
debt and money market instruments with duration of the portfolio is greater
than seven years.
10. Dynamic Bond
These schemes are open-ended dynamic debt schemes investing
across duration.
11. Corporate Bond Fund
These funds are open-ended debt schemes predominantly investing
a minimum 80% of total assets only in highest rated corporate bonds.
12. Credit Risk Fund
Open-ended
debt scheme investing at least 65% of total assets in below highest rated
corporate bonds.
13. Banking and PSU Fund
Open-ended
debt schemes predominantly investing at least 80% of total assets in debt
instruments of banks, PSUs, Public Financial Institutions.
14. Gilt Fund
Open-ended
debt scheme investing in government securities across maturity. Minimum
investment in Gsecs is 80% of total assets.
15. Gilt Fund with 10-year constant duration
These funds are open-ended debt schemes investing in government
securities having a constant maturity of 10 years. Minimum investment in Gsecs
is 80% of total assets with Macaulay duration is equal to 10 years.
16. Floater Fund
Open-ended
debt scheme predominantly investing minimum 65% of total assets in floating
rate instruments.
Taxation of Debt funds
Capital gains from debt schemes
are taxable. LTCG (Long Term Capital Gains) from debt funds are taxed at 10% without
indexation and 20% with indexation.
STCG (Short Term Capital Gains) from debt funds are added to the investor’s income and taxes are levied according to his/her income tax slab.
STCG, when holding period of debt funds is less than 3 years and LTCG, when holding period of debt schemes is more than 3 years.
STCG (Short Term Capital Gains) from debt funds are added to the investor’s income and taxes are levied according to his/her income tax slab.
STCG, when holding period of debt funds is less than 3 years and LTCG, when holding period of debt schemes is more than 3 years.
Why invest in Debt Funds?
The major benefits of
investing in debt funds are ease of investment, low-cost
structure, greater flexibility, steady returns, high liquidity and moderate
risk.
Thus, debt schemes can be a good option of investment to investors for achieving their financial goals if they do not want to bear the risk associated with equity investments.
Thus, debt schemes can be a good option of investment to investors for achieving their financial goals if they do not want to bear the risk associated with equity investments.
Also read: How to start a SIP?
If you liked this article, share it with your friends and colleagues through social media. Your opinion matters, please share your comments.
Very informative
ReplyDeleteI am glad you liked it.
Delete