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Getting to Know Debt Funds

The ideal investment portfolio must balance risk and reward, with a mix of investment tools chosen according to the individual’s objectives, time horizon and risk appetite. 
Apr 2023
3 mins read
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The ideal investment portfolio must balance risk and reward, with a mix of investment tools chosen according to the individual’s objectives, time horizon and risk appetite. One category of tools popular with more cautious investors is debt funds. These are relatively low-risk mutual fund investments that could help you earn moderate returns over a shorter period.
Debt funds are also known as fixed income or bond funds. They’re mutual fund schemes that invest in fixed income instruments, which include corporate debt securities, treasury bills and government bonds, offering investors income as well as possible capital appreciation.
Debt funds might be ideal if, for instance, you want to create an emergency fund, or give your car a full servicing in a few years. They are also suitable for investors who are cautious or sceptical about stock market performance, as they offer stable returns while minimising the risk of market volatility.

Know the 16 types of debt funds
  1. Overnight Funds – These funds invest in fixed income instruments with a duration of one day, and aim to provide liquidity to investors at the prevailing yield levels. Their convenience makes them suitable for corporate treasuries and other investors looking to park their funds for a very short duration.
  2. Liquid Funds – As the name suggests, these funds offer liquidity. The underlying assets of the fund have a short maturity duration, typically less than 90 days. They are suitable for corporates and individuals looking to build an emergency corpus. Their primary aim is to negate volatility and provide higher liquidity to its investors.
  3. Ultra-Short Funds – These funds suit investors looking to park their money for 3-6 months. They invest in a mix of debt securities and money market instruments and leave you well-placed to meet specific cash outflow requirements after a few months. 
  4. Low Duration Funds – These funds cater to investors looking to invest cash for 6-12 months and avail of potentially higher returns than ultra-short funds.  
  5. Money Market Funds – These funds have an investment horizon not exceeding one year, and aim to provide returns through interest income and potential capital appreciation.
  6. Short Duration Funds – These funds invest in multiple securities to maximize returns, and come with a maturity period of 1-3 years.
  7. Medium Duration Funds – These funds have a maturity period of 3-4 years and invest in a mix of government, public and private sector bonds for optimum returns and safety of capital.
  8. Medium to Long Duration Funds – These funds have an investment horizon of 4-7 years and aim to optimise returns for investors by investing in an array of corporate and government bonds.  
  9. Long Duration Funds – The investment horizon on this category of fund exceeds seven years. Given this long horizon, they invest in long maturity debt which has the potential to offer substantial returns to investors.
  10. Dynamic Bond Funds – This is a versatile category with no restrictions on security type or maturity horizon for parking funds. Funds here are dynamically managed, and the fund managers will realign the weights and securities depending on market situations.
  11. Corporate Bond Funds – These funds invest over 80% of their capital in the most secure corporate bonds, rated AA+ or higher.  
  12. Credit Risk Funds – These funds invest at least 65% of their capital in corporate bonds rated below AA+, offering both higher risk and reward for investors when compared to corporate bond funds.  
  13. Banking and PSU Funds – These debt mutual funds invest a minimum of 80% of their total assets in bank, PSU and public financial institutions’ papers. They aim to maximise returns while minimising liquidity and risk.
  14. Gilt Funds – This is a category of highly secure funds that invest in government securities with varying maturity periods.
  15. Gilt with 10 Year Constant Duration Funds – These funds offer a consistent portfolio duration of 10 years, investing a minimum of 80% of their total assets in government securities.
  16. Floater Funds – Funds in this category invest at least 65% of their total assets in floating-rate bonds. The rates of underlying assets are reset periodically.

The advantages of debt funds

  • They are less risky than equity investments and thus help investors minimise their portfolio risk.
  • They are suitable for short-term deployment, offering stable returns compared to other assets like equities.
  • They allow retail investors to access instruments not directly available for subscription.
  • They make for a low-cost investment, as they do not usually come with an exit load and SEBI has capped their TER at 2%***.
  • They offer varying investment horizons catering to different needs.

Debt funds are a less volatile investment option than equity funds and could provide a steady source of secondary income. Their precise level of risk and return depends on the nature of the individual fund. Consult a financial advisor who will help you choose the fund that’s right for you. 

***https://www.amfiindia.com/investor-corner/knowledge-center/Expense-Ratio.html
Disclaimer: Mutual fund investments are subject to market risks, read all scheme-related documents carefully.

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PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
Toll Free Number: 1800 209 7446
Email: care@pgimindia.co.in
This is an investor education and awareness initiative by PGIM India Mutual Fund.
The information is for general purposes only and not an investment advice. All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out directly to the AMCs. If they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SEBI SCORES portal at https://scores.sebi.gov.in/scores-home/.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
The information contained herein is provided by PGIM India Asset Management Private Limited (the AMC) on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, the AMC cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance* (or such earlier date as referenced herein) and is subject to change without notice. The AMC has no obligation to update any or all of such information; nor does the AMC make any express or implied warranties or representations as to its completeness or accuracy. There can be no assurance that any forecast made herein will be actually realized. These materials do not take into account individual investor's objectives, needs or circumstances or the suitability of any securities, financial instruments or investment strategies described herein for particular investor. Hence, each investor is advised to consult his or her own professional investment / tax advisor / consultant for advice in this regard. The information contained herein is provided on the basis of and subject to the explanations, caveats and warnings set out elsewhere herein. The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisions regarding investment/ disinvestment in securities market and/or suitability of the fund based on their specific investment objectives and financial positions and using such independent advisors as they believe necessary.
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