Debt Funds: Types of Debt Funds

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.

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.

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.

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.

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.

Also read: What are mutual funds | Benefits of investing in mutual funds

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Also read: 7 Things to know before buying ELSS tax saving mutual funds

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