As we all understand debt mutual funds are ideal investment options for short term investments. Their risks are much lower than equity or equity oriented funds, they have the potential to generate superior returns compared to traditional fixed income products and they enjoy a significant tax advantage over bank savings and Fixed Deposits. But how many of us know that there are around 15 to 16 different categories of debt mutual funds with different investment strategies. Let’s have a look at them:
- Debt Overnight Funds. Invest in only those securities which are having maturity of only one day.
- Debt Liquid Funds. Invest in securities having maturity of upto 91 days.
- Debt Ultra Short Term Funds. Invest in debt and money market instruments(treasury bills, commercial papers etc) which are maturing between 3 to 6 months. I am deliberately not getting into technical term of Macaulay Duration.
- Debt Low Duration Funds. Invest in debt and money market instruments which are maturing between 6 to 12 months.
- Debt Money Market Funds. Invest in debt and money market instruments having maturity of upto one year.
- Debt Short Term Funds. Invest in debt and money market instruments which are maturing between1 to 3 years.
- Debt Medium Term Funds. Invest in debt and money market instruments which are maturing between 3 to 4 years.
- Debt Medium to Long Term Funds. Invest in debt and money market instruments which are maturing between 4 to 7 years.
- Debt Long Term Funds. Invest in debt and money market instruments which are maturing in more than 7 years.
- Debt Dynamic Funds. Invest across the duration.
- Debt Corporate Bond Funds. Invest minimum 80% of the total assets in highest rated corporate bonds.
- Debt Credit Risk Fund. Invest minimum 65% of the total assets in corporate bonds, although in below highest rated instruments.
- Debt Banking and PSU Funds. Minimum 80% of the total assets needs to be invested in debt instruments of Banks, PSU and Public Financial Institutions.
- Debt Gilt Funds. Minimum 80% of the assets need to be invested in Government securities(G-sec) across all maturities.
- Debt Floater Funds. Minimum 65% of the assets need to be invested in floating rate instruments.
Each of these debt mutual funds generate different return on Investments based on the prevailing interest cycle and anticipated movement of interest rate in future. One needs to choose an appropriate debt fund keeping in mind risk appetite and expected returns.