Debt Mutual Funds – Must Know About all 16 Categories

In order to bring uniformity in mutual fund investments, the Securities and Exchange Board of India (SEBI) prescribed a uniform classification of mutual fund schemes a few years ago in October 2017. But most of the investors are still not aware of this classification. Mutual fund houses were required to align their existing and potential schemes under the prescribed categorisation. Equity mutual funds got 10 distinct categories while debt funds ended up with 16 new ones.

Are you a conservative investor? Are you not willing to take high risk?

If, yes then you should invest in Debt Mutual Funds. Debt Mutual funds are the best bet for you if you prefer small but stable returns over possibility of high returns with high risk involved. These funds will provide you with better returns than your saving bank account. So if you have surplus funds to park for a while then you should definitely check out debt mutual funds.

But Do you know the different categories of debt mutual funds?

If you are thinking of investing in debt mutual funds, you should know the different categories to understand the underlying assets of the fund. Categorization of debt mutual funds is mostly done on the maturity date of the underlying assets and the type of assets selected for investment. The underlying risk of each category, therefore, varies depending on the investment horizon of each fund.

Here are the 16 different fund categories of a debt mutual fund scheme –

Different types of Debt Mutual Funds

1. Overnight funds – These funds invest in assets which mature overnight. The scheme is an open-ended scheme where the underlying assets have a maturity period of 1 day.
2. Liquid funds – Under this category, the maturity period increases. The underlying assets of the fund have a maturity period of up to 91 days and include money market securities and other short-term debt instruments.
3. Ultra-short duration funds – The portfolio of this debt mutual fund scheme has assets which have a maturity period of more than 91 days but less than 6 months.
4. Low duration funds – These schemes invest in debt securities which have a maturity tenure ranging from six months to 12 months
5. Money market funds – These debt funds invest in money market instruments which have a maturity tenure of up to one year
6. Short duration funds – Assets which have a maturity duration of one to three years are selected for investment under this mutual fund scheme
7. Medium duration funds – These funds invest in assets which have a maturity duration of three years to four years
8. Medium to long duration funds – These funds invest in securities with a maturity period of four years to seven years
9. Long duration funds – As the name suggests, long duration funds invest in long-term debt assets. The maturity of such underlying assets is greater than seven years
10. Dynamic bonds – Dynamic funds do not have a particular affinity to the maturity duration of the underlying assets. These funds invest in multiple assets having different maturity tenures
11. Corporate bond fund – These funds primarily select corporate bonds as their underlying assets. High rated bonds of reputed corporates are chosen for investment under these funds. At least 80% of the portfolio should be invested in corporate bonds
12. Credit risk funds – These funds also invest at least 65% of their AUM in corporate bonds. However, the bonds selected for investment are rated lower than the bonds selected for corporate bond funds. So, if a corporate bond fund selects A+++ corporate bonds, credit risk funds would select corporate bonds which are below this rating.
13. Banking and PSU funds – At least 80% of the assets of this fund scheme is invested in debt securities of banking institutions, public sector undertakings (PSUs) and public finance institutions.
14. Gilt funds – The assets of a gilt fund are predominantly invested in Government securities. At least 85% of the fund is invested in government securities which might have varying maturity tenures
15. Gilt funds with 10-year constant duration – The name of these funds denote their characteristics. The fund invests in government securities which have a maturity period of 10 years.
16. Floater funds – Floater funds are named so because the assets they invest in have a floating rate of interest. At least 65% of the fund’s assets are directed towards such instruments with floating interest rates.

Tax Implication of Debt Funds

Debt Mutual funds are taxed as short term Capital Gain and Long term Capital Gain. Short term Capital Gain is the gain which you get if you redeem your fund within 3 years of investment and it is taxed as per your income tax slab rates. On the other hand, long term capital gain (LTCG) is the gain that you get if you sell your investment after completion of 3 years. LTCG is taxed at 20% with indexation benefit.