Debt funds you will ever need

The ongoing turmoil in debt funds has left investors wondering which debt fund is best for them among the wide variety available. In reality, you don't have to worry about most types of debt funds. These four debt-oriented categories are all that you will ever need. For debt-fund investors, alarm signals keep coming. Every few months or so, some company's bonds go underwater and a handful of debt funds more have sudden, sharp drops in their NAVs. In principle, investors should not be surprised because after all, we're constantly reminded that 'mutual funds are subject to market risk'. In practice, we expect debt funds to be low or zero risk. The solution is not to avoid all debt funds because debt plays a crucial role in any investment portfolio. Sure, you can just switch to bank fixed deposits or RBI bonds or some such thing, but you'll have to suffer lower returns, higher taxation and poorer liquidity. As always, the real solution is to be realistic and tune your investments to the risk you can tolerate and this article will help you do exactly that. What we have here is the ultimate keep-it-simple guide to debt-fund investing. Though Indian fund houses offer 16 different kinds of debt funds, at Value Research, we think that you can get by quite well with just four types. Actually, two of these are hybrid funds but they predominantly invest in debt instruments. Hence, we have discussed them in the same space. Pick your favourite based on your financial goals. Liquid funds for anytime money Liquid funds are your best bet if you are looking for a short-term parking ground for your money which you may withdraw at any time. They are the debt funds with the least volatile returns. Liquid funds are mandated to invest in debt instruments that mature within 91 days and in practice, many of them invest in 30- to 60-day securities. The typical liquid fund's portfolio is made up of treasury bills, commercial paper and CBLO or money-market instruments (instruments through which banks, institutions or companies borrow quick money against collateral). Therefore, if you've received a big bonus from your employer or a windfall from a rich uncle and are unsure where to invest that money, your immediate parking ground can be a liquid fund until you decide what to do with it. Liquid funds are also ideal for creating that emergency fund amounting to six months or one year of expenses that most financial planners advise. When life hands you googlies such as sudden loss of e