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Best Debt Fund

SEBI (Securities and Exchange Board of India) has categorised mutual funds in to five main categories that is, equity schemes, debt schemes, hybrid schemes, solution-oriented schemes and other schemes. In this post, we would be dealing with debt funds and understanding what are debt funds, various sub-categories of debt funds and expectations that you should keep from debt funds.

Best Debt MF

  • What are debt funds?
    Debt fund is nothing but a mutual fund that invest in fixed income securities such as term deposits, money market instruments, bonds, debentures, commercial papers, certificate of deposits, government securities, etc. Debt funds are an essential and integral part of one’s portfolio. Unlike equity mutual funds that are directly proportional to the stock market movements, debt mutual funds are inversely proportional to interest rates.
    In the rising interest rate scenario, bond prices fall and in falling interest rate scenario they surge. The only exception to this is floater funds. These funds usually are directly proportional to interest rates. As they invest in floating interest rate securities or synthetically create one using swaps.
  • What are risks involved?
    Debt funds though are lower on risk compared to equity funds, but they are indeed not risk free. Debt funds are prone to risks such as interest rate risk, credit risk, reinvestment risk and liquidity risk. Credit ratings play a very crucial part, as it helps in understanding the underlying credit risk.
  • How debt mutual funds are taxed?
    The taxation of debt funds is different as compared with equity. In fact, the definition of long-term capital gain and short-term capital gain is also different. In case of debt funds, investments holding period being greater than or equal to three years is considered as long-term capital gain and less than that is considered as short-term capital gains. The short-term capital gains from debt funds are added to your income and is taxed as per your individual tax slabs. Whereas in case of long-term capital gains, 20 per cent tax is levied with indexation benefit.
  • What should be your returns expectations?
    As debt mutual funds are lower on the risk part compared to equities, the potential returns would also be on the lower end compared to equity mutual funds. Therefore, if some debt fund is giving higher returns, then beware as the risk undertaken too would be higher. The best ways avoid this is to check the funds YTM (Yield to Maturity) and compare it with the category average YTM. This will help you avoid funds that are unnecessarily taking higher risk.

Sub-Category Definition
Overnight Fund Investment in overnight securities having maturity of 1 day
Liquid Fund Investment in Debt and money market securities with maturity of up to 91 days only
Ultra-Short Duration Fund Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months - 6 months
Low Duration Fund Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months- 12 months
Money Market Fund Investment in Money Market instruments having maturity up to 1 year
Short Duration Fund Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year – 3 years
Medium Duration Fund Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 years – 4 years
Medium to Long Duration Fund Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 – 7 years
Long Duration Fund Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is greater than 7 years
Dynamic Bond Investment across duration
Corporate Bond Fund Minimum investment in corporate bonds- 80% of total assets (only in highest rated instruments)
Credit Risk Fund Minimum investment in corporate bonds- 65% of total assets (investment in below highest rated instruments)
Banking and PSU Fund Minimum investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions- 80% of total assets
Gilt Fund Minimum investment in Government Securities - 80% of total assets (across maturity)
Gilt Fund with 10-year constant duration Minimum investment in Government Securities- 80% of total assets such that the Macaulay duration of the portfolio is equal to 10 years
Floater Fund Minimum investment in floating rate instruments- 65% of total assets

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