Debt mutual funds are mutual funds that pool in Investments for Investing in fixed income securities like treasury bills, corporate bonds, commercial papers, government securities, Gilt fund, fixed maturity plans (FMPs), monthly income plans (MIPs), short-term plans (STPs), liquid funds, and long-term plans (LTPs), etc. Some of the schemes Invest in short-term securities, while some Invest in Long-Term securities concerning risk and reward of the scheme.
The debt instruments have a maturity date and interest rate that the Investor can receive on the maturity of the bonds. The returns are usually not affected by fluctuations in the market. Therefore, debt securities are considered to be low-risk investment options.
Types of Investors in Debt Mutual Funds:
- Short-term investors (3-12 months): Short-Term Investors who are planning to keep the funds in saving bank account for the period (3-12 Months), can invest in Debt funds which offer 7-9% PA returns. Whereas Saving bank account gives Interest 3-4% PA.
- Medium-term investors (3-5 years): Medium-Term investors with a low-risk instrument for 3-5 years, Fixed deposit in banks can also give similar returns but Investing in a dynamic bond fund for a similar tenure tend to offer better returns than Fixed deposits in Banks. Investors can opt for Monthly Income Plans that provide monthly pay-outs if required.
Types of debt mutual funds:
- Overnight Fund: Overnight Fund invests in debt securities having a maturity of 1 day. These funds are considered to be extremely safe since both credit risk and interest rate risk is negligible.
- Liquid Fund: Liquid Funds invests in money market instruments having a maturity of a maximum of 91 days. Liquid funds will offer better returns compared to saving bank accounts.
- Banking and PSU Fund: Banking and PSU Fund invests a minimum of 80% of total assets in debt securities of PSUs (public sector undertakings) and banks.
- Money Market Fund: Money Market Fund invests in money market instruments with a maximum maturity of 1 year. These Funds are designed in a manner that allows the fund manager to generate higher returns while keeping risk under control through adjustment of lending duration.
- Dynamic Bond Fund: Dynamic Bond Fund invests in debt instruments of varying maturities based on the interest rate regime. Maturity is adjusted based on market conditions to improve returns for the investors.
- Corporate Bond Fund: Corporate Bond Fund invests a minimum of 80% of its total assets in corporate bonds having the highest ratings. These funds are good for investors who are looking for lower risk and planning to invest in high-quality corporate bonds.
- Ultra-Short Duration Fund: Ultra-Short Duration Fund invests in debt securities and money market instruments where the Macaulay duration of the scheme is between 3 and 6 months.
- Low Duration Fund: Low Duration Fund invests in debt securities and money market instruments where the Macaulay duration of the scheme is between 6 and 12 months
- Short Duration Fund: Short Duration Fund invests in debt securities and money market instruments where the Macaulay duration of the scheme is between 1 and 3 years.
- Medium Duration Fund: Medium Duration Fund invests in debt securities and money market instruments where the Macaulay duration of the scheme is between 3 and 4 years.
- Medium to Long Duration Fund: Medium to Long Duration Fund invests in debt securities and money market instruments where the Macaulay duration of the scheme is between 4 and 7 years.
- Long Duration Fund: Long Duration Fund invests in debt securities and money market instruments where the Macaulay duration of the scheme is above 7 years.
- Gilt Fund: Gilt Fund invests a minimum of 80% of its investible corpus in government securities across varying maturities. These funds do not carry any credit risk. However, the interest rate risk is high.
- Credit Risk Fund: Credit Risk Fund invests a minimum of 65% of its investible corpus in corporate bonds having ratings below the highest quality corporate bonds. Therefore, these funds carry an amount of credit risk and offer slightly better returns than the highest quality bonds.
- Floater Fund: Floater Fund invests a minimum of 65% of its investible corpus in floating rate instruments these debt securities Interest will fluctuate according to the market. These funds carry a low interest-rate risk.
Advantages of Debt Mutual Funds:
- Debt mutual funds invest in Bonds and Govt securities so the returns are not affected by market fluctuations. This mutual fund provides better returns compared to Bank FD and Saving bank account deposits.
- Debt mutual funds provide a wide variety of schemes based on risk management and duration; Investors have many options to choose the scheme which is suitable for low risk.
- Debt mutual funds are having a very low expense ratio in the mutual funds.
- Debt mutual funds are having high liquidity. Ex. Funds can be withdrawn within a day in overnight funds.
Disadvantages of Debt Mutual Funds:
- Debt mutual funds are not suitable for Investors expecting High returns.
- Debt mutual funds returns are low compared to other Equity Mutual funds.
- Debt mutual funds have credit risk where the possibility of going default by the borrower by Issuing Bonds.
- Liquidity in Non-Government Bonds would be difficult when there is some serious crisis in the Market. Fund managers would not find buyers.
Top 5 Debt Mutual funds:
1. Franklin India Corporate Debt Fund:
Fund size : Rs. 829 Cr
1 Yr Return : 9.7% PA
3 Yrs Returns : 8.7% PA
5 Yrs Returns : 8.9% PA
10 Yrs Returns : 9.6% PA
NAV as on 08-Oct-2020 : Rs. 79.22
Expense Ratio : 0.29 %
2. HDFC Short-Term Debt Fund:
Fund size : Rs. 13,569 Cr
1 Yr Return : 11.1% PA
3 Yrs Returns : 8.9% PA
5 Yrs Returns : 8.7% PA
10 Yrs Returns : 9.0% PA
NAV as on 08-Oct-2020 : Rs. 24.32
Expense Ratio : 0.24%
3. Aditya Birla Sun Life Banking and PSU Debt Fund:
Fund size : Rs. 13,519 Cr
1 Yr Return : 10.72% PA
3 Yrs Returns : 8.8% PA
5 Yrs Returns : 9.1% PA
10 Yrs Returns : 9.7% PA
NAV as on 08-Oct-2020 : Rs. 283.02
Expense Ratio : 0.35%
4. Kotak Banking and PSU Debt Fund:
Fund size : Rs. 9,132 Cr
1 Yr Return : 10.6% PA
3 Yrs Returns : 9.0% PA
5 Yrs Returns : 9.0% PA
10 Yrs Returns : 9.2% PA
NAV as on 08-Oct-2020 : Rs. 50.32
Expense Ratio : 0.34%
5. SBI Debt Hybrid fund:
Fund size : Rs. 959 Cr
1 Yr Return : 7.6% PA
3 Yrs Returns : 5.1% PA
5 Yrs Returns : 7.6% PA
10 Yrs Returns : 8.8% PA
NAV as on 08-Oct-2020 : Rs. 45.98
Expense Ratio : 1.20%
Disclaimer: All the above informationis for educational purposes only, and the mutual fund’s companies shown are not considered as recommendations as the above data might vary from actuals in the period. kindly read the scheme and policy-related documents carefully before investing in any mutual funds and visit the official website for more information.
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