Classification of Debt Funds

Classification of Debt Funds

If we consider the classification of debt funds, then you will realize that it is quite simpler as compared to equity funds. There are two main characteristics of debt fund investments – credit rating as well as maturity. It is quite simple to learn about maturity. The date of maturity of a bond is the date on which the bond’s principal value has to be returned to the investor.

If a change takes place in the rate of interest, then it can make a specific bond more or less valuable. With a decline in the rate of interest, older bonds which had a higher interest rate, tend to get more valuable. On the contrary, with the rise in the rate of interest, older bonds tend to valueless.

There is a direct connection between the alteration in the value of a bond and the time left for the maturity of the bond. It is sensible. We will give you an example. With a fall in the rates of interest, the older bonds get more valuable. But the bond which has ten years left for maturity will be more valuable than the one which has just one year left for maturity. The one with ten years' time period will go on paying a higher rate of interest for such a long period.

Then the most significant element is residual maturity and not the total lifetime of the bond. The meaning of residual maturity is the time left for the date of redemption of the bond. This means a freshly issued two-year bond will have the same residential maturity as a twenty-year bond issued eighteen years ago. If there is a similarity in these two bonds, then an alteration in the rate of interest will affect their value equally.

Residual maturity is responsible for determining the return and risk level of a bond. When there is very little time left for the maturity of a bond, then you can consider it to be less risky less profitable as well. Bonds with a more extended maturity period are just the same. This is one of the best ways to categorize bonds.

Following is the detailed classification of debt funds, depending upon their maturity:

  • Liquid fund: Investment in money market and debt securities having a maturity period of 91 days only.
  • Overnight fund: Investment in overnight securities, with the maturity of just a single day.
  • Ultra-short duration fund: Investment in Money market and debt instruments, having a maturity period of just three to six months.
  • Money market fund: Investment in money market instruments, with a maturity period of up to one year. 
  • Low duration fund: Investment in money market and debt instruments with a maturity period of six months to twelve months.
  • Medium duration fund: Investment in money market and debt instruments, having a maturity period of three to four years.
  • Medium to long-duration fund: Investment in money market and debt instruments with a maturity period of four to seven years.
  • Dynamic fund: Investment that varies according to duration.
  • Long duration fund: Investment in money market and debt instruments with a maturity period of more than seven years.
  • Short duration fund: Investment in money market and debt instruments with a maturity period ranging from one to three years. 

There are some other types of debt funds, too, with different types of security investments:

  • Corporate bond funds:  Corporate bonds receive an investment of at least 80%.
  • Gilt funds: A minimum of 80% is invested in government securities. The government of India issues these securities or gilts. 
  • Gilt funds with ten-year constant duration: At least 80% of the total assets get invested in G-secs. The Macaulay duration is around ten years.
  • Credit risk fund: At least 65% gets invested in the corporate bonds.
  • Floater funds: The instruments of floating rates consist of at least 65% assets.
  • Banking and PSU funds: These funds get at least 80% investment in Public Sector Undertakings, Public Financial Institutions and debt instruments of banks.