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What are various types of Debt Funds?

I am hearing a lot about debt funds? Are they good considering the market situation? What are different types of debt funds?

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Pijush Kanti Biswas

Debt fund is a mutual fund which invests most of the money gather from investors into fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificate of deposit, treasury bills etc.

Various types of debt fund available in market are:

1. Gilt Funds:

  • In gilt funds, investors invest their money in securities issued by both central and state government.
  • For long term investment in gilt fund, they are the riskiest of all other debt funds available in market due to their sensitivity to change in interest rates.

2. Income Funds:

  • In income funds, investors invest their money in debt instruments like corporate debentures and government securities.
  • Income funds are for investors with high risk appetite and works well for long-term investment since there is high risk of change in interest rates.

3. Monthly Income Plans(MIPs):

  • MIPs is the mixture of equities (around 10-15%) and fixed income securities.
  • MIPs are suitable for investors with big lumpsum amount and want a monthly income on their investment.

4. Short term funds:

  • If you want to invest for a shorter duration, say for 3-6 months, then these are best debt funds for you to invest in.
  • Short term funds invest in papers like Commercial Paper(CPs) and Certificate of Deposit(CDs).

5. Liquid Funds:

  • These are the debt funds which can be easily converted in to cash that too within a day time. Liquid funds invest in highly liquid money market securities like Commercial Paper(CPs), Treasury Bills and Certificate of Deposit(CDs).
  • They invest in instruments with a maturity period of up to 91 days.
  • Among all debt funds, liquid funds provide most stable returns.
  • Liquid funds are best suited investors having surplus amount lying idle in savings bank account and are intent to get better returns.

6. Fixed maturity plans:

  • These funds have fixed maturity period, investing in papers with matching maturity.
  • They take away the risk of change in interest rates by holding it till maturity.

Some examples of Debt funds are:

Happy Investing!

Lalit

Here are various types of debt funds: 

Debt – Liquid Funds

These invest in short term (90 days) bonds and other similar instruments. One can use them as an emergency fund. These are meant for parking your money and keep it handy so that you can redeem it as and when required. Returns are taxed as per your income tax slab if sold before three years.

Purpose: Invest in these funds if you want to park your money as an emergency fund, and redeem as per need.

Debt – Ultra Short Term Funds

These funds invest in short term (one year) bonds. If you are saving for very short-term goals like a vacation or buying an automobile, then this category is ideal for gains within one year. It is also an excellent resort to park your money until you decide where to invest or spend next. Returns are taxed as per your income tax slab if sold before three years and have negligible tax post that period.

Purpose: Invest here for your short term goals like a vacation, buying a bike, jewelry or expensive gadget.

Debt – Short Term Funds

Short term funds are similar to ultra-short term investments but with a duration of approximately three years. If your goals are to manage expenses while buying a house or planning a marriage within one to three years, then this category can help you with decent returns without any risk factors. Returns are taxed as per your income tax slab if sold before three years and have negligible tax (20% with indexation benefit) post that period.

Purpose: Invest in these funds if you are aiming to buy a house or plan a wedding within three years.

Debt - Dynamic Mutual Funds

These funds switch aggressively between short term and long term debt funds with a real opportunistic performance. These invest in a nutshell to long term bonds, etc. with an objective to generate regular income by changing allocation across different segments. Returns are taxed as per your income tax slab if sold before three years. After three years, long term capital gains tax apply (negligible).

Purpose: Invest in these funds with an objective to generate regular dividend/income.

Debt – Credit Opportunities

These funds show similar action like Debt – Dynamic by investing in debt ranging from short to long term with an objective to generate high-interest income, but the investment goes to low-grade corporate bonds. If you are willing to take the risk for higher gains, then this category is something you should look at. These funds are suitable for Monthly Income Plans(MIP) funds to invest in Medium to Long term bonds.

Purpose: Invest in these funds when you are ready to risk your monthly income generation plan. The category can be clubbed with debt- dynamic to lower down the risk factor.

Debt – MIP (Monthly Income Plans)

MIP (Monthly Income Plan) invests a small portion of the portfolio in equities (10-20%) and rest in the fixed income securities. Their objective is to generate regular monthly income. Monthly Income Plans funds invest in Medium to Long term bonds, etc. with an aim to produce a monthly dividend. Returns are taxed as per your income tax slab if sold before three years and have negligible tax (20% with indexation benefit) post that period.

Purpose: Invest in these funds if you are looking to generate monthly income with little risk.

Debt - Gilt

If you are a kind of a person who would want to go for funds that are safe and provide high returns than Debt Gilt is something which you shouldn’t avoid. These funds invest in the fixed income securities issued by Government of India with almost zero risks to the investor. The returns range from anything between 10 percent to 13 percent or more depending on the area of investment.

Returns are taxed as per your income slab if sold before three years and post that negligible tax (20% indexation benefit) post three years.

Purpose: Invest to gain good returns without taking much of risks.

Debt - Income

So we described Dynamic Funds and explained how they change their investment to maximize the profit, similarly in the debt income funds, the investments are made in the bonds to generate regular sources of revenue without much of risk. They change allocation among different debt segments to maximize the returns.

The risk is low, and returns are good ranging from 9 to 10 percent. Returns are taxed as per your salary slab if sold before three years post that negligible tax (20% with indexation benefit) post three years.

Purpose: To generate secondary sources of income from investments without taking much of risks.


Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.
Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.
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