I want to find out the difference between the following debt funds: short-term funds, ultra short-term funds, income funds, liquid funds and gilt funds.
-Ankur Bansal
There are many kinds of debt funds, but legally, on the basis of taxation, there are only two types: liquid funds and non-liquid funds. Liquid funds are those funds that don’t invest in securities of more than 91 days of maturity. From September 2012, it will be mandatory for them to invest in securities of not more than 60 days. So, their underlying portfolio will be more liquid and the tax treatment will be marginally different.
Among the other funds, as classified by Value Research, which is well-accepted and followed in the market place, the first are the ultra short-term funds. These funds have a maturity ranging between 90 days and 1.5 years, which make them less volatile. The next category is the short-term funds, which have a maturity of 1 to 3 years. Last year, short-term funds were the best performing debt fund category and were able to deliver 9 per cent on a consistent basis. Then come the income funds, which are the most flexible ones, where the fund managers take a view on interest rates. On occasions, their portfolio maturity can be well up to 15 years or even as low as 1 or 2 years. Income funds are a key beneficiary of rate cuts and that is a time when they see massive inflows. And the last category, the gilt funds, are a variant of the income funds, except that the underlying security must be government securities only.
This article was originally published on June 13, 2012.
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