Debt funds are mutual funds that primarily invest in debt related instruments and fixed income securities. The investment objective of Debt Fund is to provide stable income and capital protection to its investors. Out of its total assets, a debt fund allocates a majority of its portfolio to corporate bonds, government-backed securities, commercial papers, certificates of deposits, reverse repos, cash and cash equivalents, company fixed deposits, etc.
Types of Debt Mutual Funds
here are some
debt mutual funds Schemes that investors can add to their mutual fund portfolio for diversification:
liquid fund – A liquid fund is an open ended mutual fund scheme that invests in fixed income securities that come with a maturity period of up to 91 days. The objective of Liquid Fund is to generate capital appreciation by investing primarily in debt and debt related instruments.
Dynamic Bond Fund Dynamic Bond Fund is an open ended debt fund scheme that aims to generate optimum returns while maintaining liquidity through active management of a portfolio of debt and money market instruments.
corporate bond fund Corporate Bond Fund is an open ended debt scheme that invests a minimum of 80 per cent of its total assets in corporate bonds.
Ultra Short Duration Fund – An Ultra Short Duration Fund is an open-ended slow duration mutual fund scheme that invests in money market instruments having Macaulay duration between 3 months to 6 months.
short term fund – Low Duration Fund is an open ended mutual fund scheme that invests in debt and money market instruments such that the Macaulay duration of the portfolio is between 6 months to 12 months.
overnight fund Overnight Debt Funds are known to carry low interest risk as they invest in securities with maturity of only one day. These funds are generally considered by investors to create an emergency fund or medical fund. The objective of Overnight Fund is to generate capital appreciation by investing in overnight securities.
money market fund – A money market fund is a debt fund sub category that aims at capital appreciation by investing in liquid instruments such as commercial paper, high credit rating debt-based securities, treasury bills, cash and cash equivalent securities.
short term fund – Short Duration Fund is an open ended debt scheme that invests in marketable securities having Macaulay duration between 1 year to 3 years.
medium term fund It is an open ended short term debt scheme that invests in debt and debt related instruments with Macaulay duration between 3 years to 4 years.
medium to long term fund – Medium Duration Fund is an open ended debt fund that invests in debt securities having Macaulay duration between 3 years to 4 years.
long term fund Out of its total assets, a long duration fund should invest in debt and money market instruments such that the Macaulay duration of the mutual fund portfolio is longer than 7 years.
Gilt Fund Gilt fund is a type of debt fund, which has to invest 80% of the total assets in government securities in such a way that the Macaulay duration of the mutual fund portfolio becomes equal to 10 years.
floater fund Floater Fund is a debt mutual fund that aims to earn capital appreciation by investing a minimum of 65 per cent of its net assets in floating rate debt instruments.
credit risk fund – A credit risk fund aims to outperform its underlying benchmark by investing a minimum of 65 percent of its total assets in corporate bonds. However, there is no guarantee that the Fund will achieve its investment objective.
Banking & PSU Fund – Out of the total assets, a Banking and PSU Fund should invest a minimum of 80 per cent in debt instruments of banks, public sector undertakings and public financial institutions. It is an open ended scheme available to all types of investors.
concept of macaulay period
Macaulay duration is a measure of a bond’s sensitivity to interest rate changes. It is a measure of the average life of a bond taking into account repayment of principal along with coupon payments. The weighting of each cash flow is determined by dividing the present value of the cash flow by the value. Because it takes into account both coupon and maturity cash flows, it better reflects the relationship between interest rates and bond price.
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