Debt mutual fund types and their risk and returns?Asked
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. There no risk associated with gilt funds as these are backed by government. However, these not completely risk free and are vulnerable to change in interest rates. In fact, 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. So, invest in income funds if you want to gain from change of interest rates over longer period of time.
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:
As the name suggest, 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. So, the NAV of fund is not affected even if interest rates up and down.
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There are various types of debt mutual funds:
1) Liquid Funds- These funds invest in highly liquid market instruments that provide easy liquidity. These can have time period as short as one day and provide an alternative to investors to park their surplus money for a short term of time. The returns of money market funds fluctuate less as compared to other funds.
2) Ultra Short Term Funds- These funds invest in short term debt securities with some small portion in long term securities. Ultra short term funds are usually appropriate for investors who are willing to marginally increase their risk to get higher returns. The returns generated are higher than money market funds.
3) Income Funds- Income funds invest majorly in debt instruments such as government bonds, corporate bonds and money market instruments. These funds are suitable for investors who want a long term investment and have higher risk appetite since these funds are highly vulnerable to changes in interest rates. The returns from income funds are usually better than short term funds. These funds can further be classified into gilt funds, long term income funds, and dynamic bond funds.
4) Short Term Funds- Short term funds are similar to ultra short term funds with a duration of approximately three years. The returns from these funds are taxed as per your income tax slab if sold before three years and 20% with indexation benefit post that period. These funds are suitable for conservative investors with a low risk appetite.
5) Dynamic Mutual Funds- Dynamic funds switch aggressively between short term ad long term debt funds. These funds invest across all classes of debt and money market instruments with no cap on maturity, or investment type. Returns are taxed as per your income tax slab if sold before three years and post that long term capital gains tax applies.
6) Credit Opportunities- These are similar to Dynamic funds as these invest in debt ranging from short term to long term with an objective to generate high interest income. These funds are suitable for investors who are willing to take risk for higher returns.
7) Monthly Income Plans- MIPs invests a small portion of portfolio in equities and the rest in fixed income securities. These invest in medium to long term bonds with an aim to produce regular monthly income.
8) Gilt- These funds invest in fixed income securities issued by Government of India with almost zero risk to the investor. The returns range from anything between 10 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 20% indexation benefit.