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What are the Different Types of Debt Funds You Can Invest In?

What are the Different Types of Debt Funds You Can Invest In?

Debt funds are a popular investment option for both new and seasoned investors with a low-risk profile. Aside from the low risk, debt mutual funds are appealing due to their flexibility and consistency in earning fixed income. These funds are further categorized depending on their various assets’ investments and maturity period. For more on debt funds and their types, keep reading.

What are Debt Funds?

Debt funds are a kind of mutual fund that invests in debt securities. It comprises corporate and government bonds, treasury bills, commercial papers, corporate debt securities, and other money market instruments. Investing in debt funds obtains a regular interest income for capital appreciation.

These debt instruments have a fixed interest rate and a defined maturity period. Additionally, several types of debt mutual funds are accessible to suit investors’ risk tolerance, investment horizon, and financial objectives.

Different Types Of Debt Funds

Let’s take a look at some of the debt mutual fund types that are available to investors.

  • Dynamic Bond Funds

Based on the interest rate regime fluctuations, the fund manager takes the call to invest in different debt instruments with varying maturities. As a result, these funds are ideal for investors with medium risk tolerance and a three-year investment horizon.

  • Short Duration Funds

These funds have a maturity duration of one to three years. The funds are invested in various assets, including government securities, bonds, and money market instruments. These debt mutual funds are intended for investors with a low to medium risk-taking ability.

  • Corporate Bond Funds

These debt funds invest at least 80% of their assets in high-quality corporate bonds (AA+ or higher). The high-grade corporate paper provides credibility and the potential to generate significant profits with little risk.

  • Overnight Debt Funds

These funds invest in assets with a one-day maturity term. As the maturity period is so short, there is minimal interest or credit risk. These funds’ primary goal is to provide liquidity and convenience rather than high returns.

  • Liquid Funds

The capital in these funds is invested in high-quality debt instruments such as treasury bills, CDs, etc., with short maturity duration of 91 days. Since the maturity term is limited, the risk to investors is modest, as are the yields.

  • Money Market Funds

The capital is invested in debt instruments such as commercial papers, treasury bills, etc., with a maximum maturity period of one year. They seek to create returns via interest income, but their slightly longer term allows for some capital gain potential.

  • Gilt Funds

These funds invest solely in government securities of varying maturities. Gilt funds have low credit risk but are subject to interest rate swings. As a result, these funds are suited for conservative investors.

  • Credit Risk Funds

These funds deploy at least 65 per cent of their money in corporate bonds with weaker credit ratings (AA or less). Since the credit risk is high, these funds offer high-interest rates. These debt mutual funds are best for investors with high-risk-taking ability.

  • Banking and PSU Funds

A minimum of 80% of the fund corpus is invested in debt securities from PSU banks and other financial institutions.

  • Floater Funds

These funds invest a minimum of 65 per cent corpus in floating rate instruments. Here, the coupon rate is not set and is linked to a benchmark that is reviewed quarterly.

The debt funds aim to diversify the investment portfolio. However, it is crucial to consider factors such as risk, estimated returns, fee structure, maturity duration, and capital gains tax before investing.


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