What Are the Types of Debt Funds?

Debt funds also referred to as ‘fixed-income’ securities, are a mutual fund type. True to their name, debt funds invest in fixed-interest generating securities. A few of which may include corporate bonds, treasury bills, commercial paper, government securities and more market instruments. An ideal choice for people looking forward to benefiting from a steady interest income along with capital appreciation, debt funds can be categorized into various types. It must be noted that the debt funds vary based on the maturity period of the instruments in which they invest. Let us find more about it. 

Different Types of Debt Funds 

Debt funds can be classified into: 

Dynamic Bond Funds

In dynamic bond funds, the fund manager changes the portfolio composition on the basis of fluctuating interest rate regimes. This type has different average maturity periods as these funds take interest rate calls. Moreover, they invest in instruments of longer and shorter maturities.

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Income Funds

These funds take a call on the interest rates. Moreover, they invest predominantly in debt securities with extended maturities. This is one of the key reasons that make them more stable as compared to dynamic bond funds. The income funds average maturity is around 5 to 6 years. 

Short-Term & Ultra Short-Term Debt Funds

This debt fund type invests in instruments with shorter maturities, ranging from 1 year to 3 years. Short-term funds are perfect for conservative investors due to the fact that these are not affected much by interest rate movements. 

Gilt Funds

This fund type invests in only government securities - high-rated securities that have a very low credit risk. Gilt funds are an optimum choice for risk-averse fixed-income investors due to the fact that the government rarely defaults on the loan it takes in debt instrument form. 

Liquid Funds

This fund type invests in debt instruments that have a maturity of not more than 91 days, thereby making them almost risk-free. It must be noted that liquid funds see negative returns highly rarely. Moreover, these funds are superior alternatives to savings bank accounts due to the fact that they provide similar liquidity with higher yields. 

Fixed Maturity Plans

Fixed maturity plans or FMP are closed-ended debt funds. This debt fund type invests in fixed income securities. All fixed maturity plans have a fixed horizon (months or years) for which the money gets locked in. However, one can invest only during the starting offer period. In other words, fixed maturity plans are like an FD that can provide superior, tax-efficient returns without guaranteeing high returns.

Credit Opportunities Funds

This fund type is new. As compared to other funds, credit opportunities funds do not invest based on the maturities of debt instruments. This fund type takes a call on credit risks or holds lower-rated bonds with higher interest rates so as to earn higher returns. This debt fund type is a risky debt fund as compared to others. 

That said, what are you waiting for? Now that you know which type would be the best for you, go ahead and start your investment.

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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.