Here is a brief description of the major categories of debt funds
06-Jun-2017 •Dhanya Nair
Debt funds remain puzzling even for the savviest of investors. Here is a brief description of the major categories of debt funds.
Liquid funds: These funds invest in highly liquid money-market instruments and provide easy liquidity. They invest in securities with a residual maturity of not more than 91 days. Investors can park money in them for a short period of, say, a few days to a few months. Compared to other funds, these funds fluctuate very little.
Ultra short-term funds: Most ultra short-term funds invest in securities with a residual maturity of not more than one year. These funds are suitable for investors who are ready to take a marginally higher risk for slightly higher returns. Investors can park their short-term surplus for a few months to a year in these funds.
Short-term funds: These funds invest predominantly in debt securities with an average maturity of one year to 4.5 years. They are suitable for conservative investors with low to moderate risk appetite and an investment horizon of a few years.
Dynamic bond funds: They invest across all classes of debt and money-market instruments. They invest across various maturities. Their actively managed portfolio varies dynamically with the interest-rate view of the fund manager. They are ideal for investors who don't want to take a call on future interest-rate movements but still want to benefit from any positive movements.
Credit-opportunities funds: These funds invest predominantly in corporate bonds and debentures of varying maturities. Investors with a moderate risk appetite can invest in them, with a medium- to long-term investment horizon.
Income funds: These funds invest in corporate bonds, government bonds and money-market instruments with an average maturity of 4.5 years or more. They are highly vulnerable to the changes in interest rates. They are suitable for investors who are ready to take high risk and have a long-term investment horizon.
Short-term and medium- and long-term gilt funds: They invest in government securities of short term or medium- to long-term maturities.
The average maturity of their holdings can vary widely as per their declared objectives. These funds do not have the default risk since the bonds are issued by the government. The NAVs of these schemes fluctuate according to the changes in interest rates and other economic factors. These funds have a high degree of interest-rate risk, depending on their maturity. The higher the maturity of the instrument the higher the interest-rate risk.
Fixed-maturity plans (FMPs): These closed-end debt mutual funds work almost like a fixed deposit. They invest in debt instruments with maturities less than or equal to the maturity date of the scheme. FMPs are a good option for conservative investors.