What is Debt Funds?
Debt Funds are categorised into different types based on the kind of securities they invest in and the maturity (time horizon) of these securities. Debt securities include bonds issued by corporates, banks and Government, debentures issued by big corporates, money market instruments like commercial papers and certificate of deposits (CDs) issued by banks.
- Flexibility – can choose MF scheme matching your needs or criteria (Duration of investment, risk appetite etc)
- Liquidity – can redeem units any time (there can be Exit Loads on some Debt funds but by careful choice one can avoid that too)
- Tax Efficient – Dividends up to 10 lakhs from MF in an year is non taxable and hence choosing weekly or monthly dividend schemes can lead to lesser Short term gain on redemption
- Short Period Investments – One can invest for even 3 days too and redeem in funds like Liquid or Ultra Short Debt Funds
- Online – All transactions can be done online
- No Guaranteed return like FD – No MF scheme including the so called Monthly Income Schemes guarantee assured returns
- Erosion in Value – The value of your investment can fall below the Amount you invested. There is a myth that only Equity MF schemes will lose the value. There are many Debt Funds which have given negative returns during several periods.
- Wait times on Redemption – This is a small disadvantage. You need to wait for 1 day in case of Liquid Funds and 2 days in case of Debt Funds to get the money for any emergency redemption.(if there is a Saturday/Sunday in between you may have to wait additional 2 days too). Redemption after cut off time 3 PM will take additional 1 day. In worst case the wait time can be 4 to 5 days. Of course there are Liquid Funds with ATM cards that allows instantaneous redemption too.
Debt Funds are categorised as follows:
- Overnight Funds – invest in 1-day maturity papers (securities)
- Liquid Funds – invest in money market instruments maturing within 90 days Floating Rate Funds – invest in floating rate debt securities
- Ultra-Short Duration Funds – invest in debt securities maturing in 3-6 months
- Low Duration Fund – invest in securities maturing within 6-12 months
- Money Market Funds – invest in money market instruments with maturity up to 1 year
- Short Duration Funds – invest in securities 1-3 years maturity
- Medium Duration Funds – invest in debt securities with 3-4 years maturity
- Medium-to-Long Duration Funds – invest in debt securities with 4-7 years maturity
- Long-Duration Funds – invest in long maturity debt (over 7 years)
- Corporate Bond Funds- invest in corporate bonds
- Banking & PSU Funds – invest in debts of banks, PSUs, PFIs
- Gilt Funds – invest in Government bonds of varying maturities
- Gilt Fund with 10-years Constant Duration – invest in G-secs with 10 year maturity
- Dynamic Funds – invest in Debt Funds securities across maturities Credit Risk Funds – invest in corporate bonds below highest ratings