Debt mutual funds Predominantly invest in fixed income securities.
Fixed-Income security provides investors with a stream of fixed periodic interest payments and the eventual return of principal upon its maturity. Most popular Fixed income securities in India are bonds and fixed deposits of banks, NBFC and Companies, certificate of deposit, commercial papers, treasury bills, government securities and Deposit schemes of post office .
What are Fixed Income Securities?
Fixed income securities are a type of debt instrument that provides returns in the form of regular and fixed interest payments and repayments of the principal when the security reaches maturity. The instruments are issued by governments, corporations, and other entities to finance their operations. They differ from equity, as they do not entail an ownership interest in a company, but they confer a seniority of claim, as compared to equity interests, in cases of bankruptcy or default.
How Does Fixed Income Work?
The term fixed income refers to the interest payments that an investor receives, which are based on the creditworthiness of the borrower and current interest rates. Generally speaking, fixed income securities such as bonds pay a higher interest, known as the coupon, the longer their maturities are.
The borrower is willing to pay more interest in return for being able to borrow the money for a longer period of time. At the end of the security’s term or maturity, the borrower returns the borrowed money, known as the principal or “par value.”
What are the risks associated with debt mutual funds?
Mutual funds carries risks like credit risk, duration risk and liquidity risk.
In India the interest or the coupon paid on fixed income securities is relatively high. Today 10 year government securities carries a yield of around 5.8%. Such a high interest rate makes these schemes very attractive for investments. The long term capital gain tax structure makes investment in debt mutual funds more attractive than direct investment in fixed income securities.
Kinds of debt Mutual funds which can be offered as per SEBI rules are:
| Sr. No. | Category of Schemes | Scheme Characteristics | |
| 1 | Overnight Fund** | Investment in overnight securities having maturity of 1 day | |
| 2 | Liquid Fund | Investment in Debt and money market securities with maturity of upto 91 days only | |
| 3 | Ultra short Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months – 6 months | |
| 4 | Low Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months- 12 months | |
| 5 | Money Market Fund | Investment in Money Market instruments having maturity upto 1 year | |
| 6 | Short Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year — 3 years | |
| 7 | Medium Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3-4 years | |
| 8 | Medium to Long Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 — 7 years | |
| 9 | Long Duration Fund | Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is greater than 7 years | |
| 10 | Dynamic Bond | Investment across duration | |
| 11 | Corporate Fund | Bond | Minimum investment in corporate bonds- 80% of total assets (only in highest rated instruments) |
| 12 | Credit Risk Fund | Minimum investment in corporate bonds- 65% of total assets (investment in below highest rated instruments) | |
| 13 | Banking and PSU Debt | Minimum investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions- 80% of total assets | |
| 14 | Gilt Fund | Minimum investment in Gsecs- 80% of total assets (across maturity) | |
| 15 | Gilt Fund with 10 year constant duration | Minimum investment in Gsecs- 80% of total assets such that the Macaulay duration of the portfolio is equal to 10 years | |
| 16 | Floater Fund | Minimum investment in floating rate instruments- 65% of total assets | |
