Top 12 – Types of Debt Funds

Similar to equity mutual funds, debt mutual funds can be divided into a number of subcategories. Different debt funds will invest in debt instruments with varying maturities based on the objectives they have set for themselves and/or the perceived level of risk they face. Let’s discuss the many types of debt funds that investors can utilise to invest their capital.

Let about secondary market which will assist you to understand this topic. Interest rate risk is the possibility that the value of a fixed-income security would decline as a result of rising or falling market interest rates. Credit risk is the possibility that a corporation that issues debt securities may be unable to repay the money it owes. You can only invest in a “Fixed Monthly Plan” closed-end debt fund during the NFO, which stands for “New Fund Offering” (FMP).

Top 12 – Types of Debt Funds

Investing in a debt fund for more than three years will result in indexation, regardless of whether the fund is an FMP. This is true even if the fund is not actively managed. The purchase prices of investments and securities can be “indexed,” which means they can increase in line with inflation. There are numerous types of debt funds currently available on the market. There is something to appeal to investors with diverse preferences. This article discusses several of the most prevalent types of debt funds.

Money Market Funds

Typically, money market funds invest in debt instruments having maturities of up to one year. Their primary objective is to generate income from interest. But because their assets are held for a longer period of time, they also stand to profit from capital gains.

Floater Funds

At least 65 percent of a floater fund’s total assets are invest in investments with variable interest rates. A “floating” interest rate is one that is subject to vary. The coupon’s interest rate is instead related to an index.

For example, the interest rate on a Floating Rate The interest rate on Savings Bonds fluctuates every three months dependent on the interest rate on National Savings Certificates. The Reserve Bank of India is responsible for the distribution of these bonds (RBI).

Dynamic Bond Funds

To keep up with fluctuations in interest rates, the portfolios of dynamic bond funds are regularly rebalance by their managers. Consider them if you have a low to moderate risk aversion and a three- to five-year investment horizon. The term “dynamic” is use to characterise these funds since they are constantly changing.

Thus, if interest rates change, the fund managers will make the appropriate portfolio adjustments. It is difficult to anticipate the average term of dynamic types of bond funds because they might invest in assets with a wide variety of maturity dates and are susceptible to interest rate calls.

Dynamic Bond Funds

Various maturities exist for the various debt instruments that dynamic debt funds can invest in. When interest rates vary, fund managers must adapt their investment strategies accordingly. A fund management may opt to invest in a portfolio with a long duration if they believe that interest rates will continue to decline. But they may switch to an allocation with a short duration if the interest cycle begins to reverse.

Income Funds

Typically, income funds invest their resources in long-term debt. They are a safer investment option than dynamic bond funds since they are less likely to fluctuate. The majority of money market fund investments are held for between five and six years.

Income funds must make rate decisions and invest the majority of their assets in long-term debt instruments. Due to this, they are more reliable than dynamic types of debt funds. Funds of income often mature between five and six years following purchase.

Gilt Funds

Gilt Fund assets have a high credit rating since they are backed by the United States government. Because it is unlikely that the government will not repay the loan it receives in the form of debt instruments, gilt funds are a desirable investment vehicle for fixed-income investors who wish to minimize their risk.

Overnight Funds

The majority of overnight funds can be invest in money market products having maturities of one day or less. For these funds, accessibility and liquidity are more crucial than the potential for profit. They are an excellent option for short-term investors, who are typically corporate treasuries seeking a place to invest their funds.

Liquid Funds

The majority of the time, liquid funds invest in debt instruments with maturities of 91 days or less. If you are searching for a secure place to save your cash for a brief period of time. These types of debt funds may be an excellent option. Due to their rapid rate of development, they pose the least level of risk. In comparison to a standard savings account, they offer higher returns.

Ultra-short Duration Funds

Scale of time that is extremely compress When selecting whether or not to invest in the funds. Investors should anticipate at least three months ahead. These types of debt funds are low-risk and offer returns comparable to or slightly higher than liquid funds. By purchasing lower-quality bonds, certain ultra-short duration funds can earn larger returns on their assets.

Low Duration Funds

Not very steady throughout time The risk associated with these funds is roughly average. Investors with a six-month to one-year horizon can benefit from their services. If the primary objective of their investment plan is to increase profits. They could add bonds with lower ratings to their portfolio.

In terms of debt investments, a Short Duration Fund maintains a good balance between short-term and long-term holdings, and its portfolios are diversified across credit quality. The optimal investment period for these types of debt funds is between one and three years. Nevertheless, their returns are typically greater than those of liquid and ultra-short duration funds, and their NAV volatility is greater.

Corporate Bond Funds

At least 80 percent of a corporate bond fund’s total assets must consist of bonds with a rating of AA+ or better. These products are ideal for risk-averse individuals who wish to generate a consistent income without putting their capital at danger.

orporate bond funds make investments depending on the credit rating of the holdings. The vast majority of other types of funds invest based on the maturity of the debt assets they own. At least 80 percent of the funds’ assets are invest in corporate bonds of the highest quality.

Compared to other debt funds that are comparable them, they offer more protection and a better return on investment. Prior to making an investment in a bond fund, it is essential to investigate and validate the quality of the corporate bonds owned by the fund.

Fixed Maturity Plans (FMPs)

Fixed Maturity Plans are a type of closed-end fund that invests in debt instruments with maturities matching or exceeding the plan duration (FMPs). FMPs often hold high-quality, low-risk debt. Instead of actively managing this types of debt funds, they just hold it until maturity, at which point they pay it off and distribute the proceeds to investors.

The primary advantage of the FMP structure is that investors can lock in their interest rates and prevent the risk of rate fluctuations. With the FMP framework, this danger can eliminate. Even though FMPs can be tradle exchanges, liquidity is frequently an issue.


Typically, the principal source of revenue for funds with a lower average maturity or term is interest payments. These types of debt funds having a longer average maturity get coupon payments and capital gains, both of which are advantageous. In order to earn more money, funds may purchase lower-rated debt, which increases the likelihood that the issuer would be unable to make payments. They can raise their holdings of long-term debt to increase the average maturity of their debt portfolio, but this will increase the volatility of their interest rates.

Originally posted 2022-12-06 06:48:00.