What are the kinds of bond funds that are available?
There are various types of bond funds that suit the needs of investors having different investment horizons. Firstly, there are ultra short-term or the liquid bond funds, which are suitable for those who want to park surplus money for a very short duration, ranging from a few weeks to about a quarter. Here the prime concern is to keep the capital intact.
Next are short-term funds, which invest in debt securities of short maturity. These funds would be suitable for investment horizon of around a year or so. Since these funds hold securities with a short maturity profile, they are less affected by the changes in the interest rates, and hence the risk of loss is lower.
A relatively new category of debt funds are floating rate funds, which invest primarily in securities carrying a floating rate coupon. The rate of interest offered by these securities keeps changing with their chosen benchmark rate. These funds are suitable in times of uncertainty. When the movement of interest rates becomes difficult to predict, these funds are a good option to park your money in.
For investment over a longer horizon, there are medium term debt funds. This category has the potential to generate far superior returns than the categories mentioned above. However, this category is also prone to more downside risk.
While the above mentioned types of debt funds are free to invest in various types of securities ranging from corporate bonds, commercial papers to gilt securities, there are also funds that are mandated to invest only in government securities.
Such funds are categorized as short-term, and medium to long-term gilt funds. Since gilt securities carry the backing of government of India, they are free from credit risk. However, please remember that if the interest rates in the economy rise, then gilt securities happen to be the worst hit.