What is a Debt Funds and how it works ?

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Mutual Funds India

What is a Debt Funds and how it works ?

Debt Funds are referred as Bond Funds, it is a Mutual Fund Scheme which invests the money in Fixed Income Securities like Government and Corporate Bonds, Treasury Bills. Generally, it comes with Short term and Long term Bonds.

Those who do not wish to invest in Equity related Funds which is said as High Risk (Volatility), can choose these Debt Funds, which is seen as Low Risk Investment Avenue. This means in the Medium to Long term, one can get better returns than Bank Deposits and benefited to Tax Indexation.

Debt Funds is a Duration based Schemes, there is a maturity on every purchase of Bonds, so that an investor can get the varied returns in a period. There are Seven Duration based Schemes available in Debt Funds through Mutual Funds route.

  • Overnight Fund:

It comes with a maturity period of one or Less than One day. The money will be invested in Overnight Securities, it is an open ended scheme in Mutual Funds. So, there is less impact on Interest rates and default in these Securities.

It is available in the Overnight Fund Category in Mutual Funds, as per SEBI Guidelines.

  • Liquid Fund:

Liquid Fund invests the money in Debt and Money market Securities, with maturity up to 91 Days. Generally, the Overnight Funds and Liquid Funds don’t have a lock-in period. But, as per the Latest announcement in the Mutual Funds Industry, there is an Exit load structure for the First 7 days for Overnight and Liquid Funds, as earlier it is not available.

Liquid Funds are also said as an alternative scheme for Bank Savings Account, where it generates better than the Savings account Interest rate.

  • Money Market Fund:

It invests the money in Money market instruments which the maturity comes up to 1 Year. It is available in the Money Market Fund Category in Mutual Funds.

It is used for Short term Needs and also provides with Higher yield on Investments.

  • Low Duration Fund:

Low Duration Funds are the short term funds, where it invests in instruments such as Macaulay duration of the portfolio is between 6 months to 12 Months. It is less volatile investment and the returns are generated better than Bank Fixed Deposits.

One can use these types of funds, when the bank rates are declining in the Low Inflation Scenario.

  • Short Duration Fund:

Short Duration Funds are comes under Duration Based Debt Fund Schemes, where the instrument maturity period is from 1 to 3 Years. It invests in a less maturity period, so that one can plan for their Short term Money needs.

  • Medium Duration Fund:

It invests in instruments such the maturity of the portfolio is between 3 to 4 Years. Those who are willing to take low to moderate risk, can use these funds and get the returns accordingly.

  • Medium to Long Duration Fund:

These funds comes under the name of Income Fund, where the investment instrument duration is from 4 to 7 Years. Those who are looking for an alternative investment for Bank FDs, can utilize this fund.

There are other theme based schemes are also available within Debt Fund Category like Corporate Bond Fund, Gilt Fund, Credit Risk Fund, Banking Fund and Dynamic Bond Funds.

Usually, when the Interest rates declines, then the Bond yields will rise and vice-versa. By understanding this, one should invest in Debt related Mutual Funds.

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