funds are the mutual funds which invest into a variety
of debt securities like treasury bills, government securities or gilts,
Certificate of Deposits (CDs), Commercial Papers (CPs), bonds and money
securities and many more.
into debt funds is somewhat different from investing
into a bond or a debt security directly. Especially in
the debt markets are underdeveloped, debt funds are sometimes the only
invest in the debt market.
of the important differences between a debt fund and a
is less risky to invest into a debt fund than to invest directly into a
investor of a bond or debt security gets the interest or the coupons
directly, whereas an investor in a debt fund receives a dividend at the
discretion of the fund house.
can be times when you may not be able to sell a debt security in the
debt market, or you may be able to sell only at a huge loss as there
may not be anyone willing to buy. With debt funds, the fund house will
always redeem your fund units at the declared NAV.
funds are managed by professional fund managers whose job is to track
and invest in the debt market. As an individual bond investor, one may
not have the time and resources to track and invest appropriately.
or debt securities have a maturity date but the debt funds do not have
a maturity date.
debt funds invest into many kinds of debt securities,
they are classified accordingly. Following are the most common classes
or Money Market Funds
the world of finance, ‘liquid’ means anything that
almost as good as cash. Money market funds or Liquid funds as they are
known as are one of the safest places to park your money for short
time. The funds invest into money market securities and debt securities
in 91 days.
corporates park their short term money into these funds.
Liquid funds are also suited for investors earning more than Rs 5 lacs,
returns from liquid funds are more tax efficient than the interest one
can get from
the savings accounts.
of the benefits of parking money into liquid funds are
are very safe
can be redeemed in 1 day
expense ratio of all the mutual funds
can invest with a minimum of Rs 5,000
periods of dividend reinvestment options – daily, weekly,
Ultra Short Term
short term funds were earlier known as liquid plus
funds and are slightly riskier in comparison to liquid funds. The
funds invest into debt securities
maturing in the next one year. Since ultra short term funds are riskier
liquid funds, they tend to give slightly higher
returns in comparison
short term funds share most of the benefits offered by
liquid funds and suit investors who want to park their money for a few
or Floating Rate funds
rate funds or Floaters invest into floating rate debt securities. Most
debt securities in a floater fund will mature within a year. The main
of investing into a floater fund is that when the RBI increases the
rates, the interest rates on floating rate debt securities also
increase, thus when
interest rates are expected to rise, floaters are better debt
investments than other
rate funds invest 65% to 100% of their money into floating rate
the rest in other debt securities.
term funds invest in debt securities that mature in the next 15
– 18 months.
They invest mostly into AAA or AA+ rated debt securities and interest
hikes mildly impact the returns. Short term funds are best suited for
with an investment horizon of 1 – 2 years.
Funds or Government Securities (G-Secs) Funds
funds invest exclusively into debt securities issued by RBI on behalf
Government of India or the state governments. Although
there is no
risk of default with G- Secs, they are not immune
to the interest rate movements. Since G-Secs have no risk of default,
a Sovereign (or SOV) rating.
come with a wide range of maturities, from a few days to 30 years, so
funds have short term and long term plans. Short term plans invest
G-Secs which mature in the next 15-18 months. Long term plans invest
G-Secs which mature in periods up to the next 30 years.
Income Plans (MIPs)
Income Plans or MIPs are hybrid investment funds. They invest a minor
to 15%) in equities and the rest into debt securities. They aim to
regular and periodic income. The income periods can be monthly,
and yearly. But a point to be noted is that the income is not
guaranteed. The fund
will only be able to distribute income if it has surplus distributable
These plans are suitable for people looking for regular income rather
bond funds aim to bring active fund management into debt funds. They
debt securities with any maturity and invest across the yield curve,
with the sole purpose of utilising
opportunity provided by inflation, changes in liquidity, changes in
policy, or government borrowing program factors. Apart from the earlier
opportunities, dynamic bond funds also tend to use the inefficiency and
volatility in the debt market to get better returns.
Risks you must know about debt funds
Credit Ratings Demystified