Debt Mutual Funds Version 2.0

Few months back, SEBI had notified the uniform guidelines to structure the mutual fund schemes and asked AMCs to follow the same. The main aim of SEBI was to bring clarity among various funds and in turn help investors take an informed decision. This is how the Version 2.0 of debt funds evolved.
 
The debt mutual funds have 16 categories post re-categorization. These categories have been formed based on two things:

1. Maturity/Duration
    

2. Focused Holding

                                                                                 



1. Maturity

Maturity is a date on which the bond issuer will pay back what was owed by him to the bond holder. Based on maturity, debt funds are classified as:

• Overnight Fund: Overnight funds invests in the securities that have maturity up to one day

• Liquid Fund: Liquid funds invests in the securities that have maturity up to 91 days

 
2. Duration

Macaulay duration indicates the time when investors would get back all the invested money in the bond by way of periodic interest payments and principal repayments. SEBI has categorised these debt funds in order of their duration.
 

• Ultra-short duration funds: Ultra-short duration funds forms a portfolio such that the Macaulay duration is 3–6 months

• Low duration funds: Low duration funds forms a portfolio such that the Macaulay duration is 6–12 months

• Short duration funds: Short duration funds forms a portfolio such that the Macaulay duration is 1–3 years

• Medium duration funds: Medium duration funds forms a portfolio such that the Macaulay duration is 3–4 years

• Medium to long duration funds: Medium to long duration funds forms a portfolio such that the Macaulay duration is 4–7 years

• Long duration funds: Long duration funds forms a portfolio such that the Macaulay duration is more than 7 years

• Dynamic bond funds: Dynamic bond funds form a portfolio which invests in securities across duration. So, they can have either low duration or long duration, depending on the interest rate scenario

• Gilt funds with 10 years of constant duration: Gilt funds with 10 years of constant duration forms a portfolio (80% of the portfolio comprises of government securities) such that the Macaulay duration is 10 years

  
3. Focused Holding
Some of the debt funds invest predominantly in money market or debt securities like corporate bonds, government securities, etc. These types of funds can be termed as focused investment funds.

• Floater funds: Floater funds comprise of at least 65% of the total portfolio in floating rate instruments

• Money market funds: Money market funds invests in money market instruments having maturity up to 1 year

• Banking and PSU funds: Banking and PSU funds' 80% portfolio comprises of securities issued by PSUs and public financial institutions

• Credit Risk Fund: Credit risk funds' minimum 65% of the portfolio comprises of low rated corporate bonds. These bonds usually pay higher interest to compensate for the higher credit risk. Credit ratings indicates the probability of bonds making repayments. Higher the credit rating, higher is the probability of repayment.

• Corporate Bond Fund: Corporate bond fund's portfolio comprises of at least 80% investments in highest rated bonds.

• Gilt Fund: At least 80% of the portfolio of gilt funds comprises investments in government securities with varying maturities.