Types of Debt Mutual Funds

Debt mutual funds are those that predominantly invest in debt securities. Since most debt securities pay periodic interest to investors, these funds are also known as income funds. However, it must be remembered that funds investing in debt products can also offer a growth option to their investors. What is more important is that the portfolio is predominantly made up of debt securities. The universe of debt securities comprises of long-term instruments such as bonds issued by central and state governments, public sector organizations, public financial institutions and private sector companies; and short-term instruments such as call money lending, commercial papers and certificates of deposits and treasury bills. Debt funds tend to create a variety of options for investors by choosing one or more of the segments of the debt markets in their investment portfolio.

  1. Liquid Funds And Money Market Funds: These debt funds invest only in instruments with maturities less than a year. The investment portfolio is very liquid, and enables investors to hold their investments for very short horizons of a day or more. The fund predominantly invests in money market instruments and provides investors the returns that are available on these instruments. In some cases, the funds also provide investors with cheque writing facility as an additional facility for liquidity.
  2. Gilt Funds: A gilt fund invests only in securities that are issued by the government, and therefore does not carry any credit risk. These funds invest in short and long-term securities issued by government. These funds are preferred by institutional investors who have to invest only in government papers. These funds also enable retail investors to participate in the market for government securities, which is otherwise a large-ticket whole sale market.
  3. Simple Debt Funds: These funds invest in a portfolio of debt securities. The fund manager has the freedom to choose from the universe of debt securities; government and other debt securities.
  4. Sectoral Debt Funds: These funds invest in a pre-specified subset of the debt markets. For example, there are debt funds that would invest only in AAA rated debt securities issued by the corporate sector.

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