Nine Different types of
Indian Debt Mutual Funds
There are different
types of Debt Mutual Funds (MFs) that invest in various fixed income securities of
different time horizons.
Some of the debt based and blended category products
(which have both debt and equity allocation) are as follows -
1. Liquid Funds / Money
Market Funds
These funds invest in
highly liquid money market instruments and provide easy liquidity. The period
of investment in these funds could be as short as a day. They aim to earn money
market rates and could serve as an alternative to corporate and individual
investors, for parking their surplus cash for short periods.
Returns on these
funds tend to fluctuate less when compared with other funds.
2. Ultra Short Term Funds
Earlier known as Liquid
Plus Funds, they invest in very short term debt securities with a small
portion in longer term debt securities. Most ultra short term funds do not
invest in securities with a residual maturity of more than 1 year.
Also
referred to as Cash or Treasury Management Funds, Ultra Short Term
Funds are preferred by investors who are willing to marginally
increase their risk with an aim to earn commensurate returns. Investors who
have short term surplus for a time period of approximately 1 to 9 months should
consider these funds.
3. Floating Rate Funds
These funds primarily
invest in floating rate debt securities, where the interest paid changes in
line with the changing interest rate scenario in the debt markets.
The periodic
interest rate of the securities held by these products is reset with reference
to a market benchmark. This makes these funds suitable for investments when
interest rates in the markets are increasing.
4. Short Term &
Medium Term Income Funds
These funds invest
predominantly in debt securities with a maturity of upto 3 years in comparison
to a Regular Income Fund. These funds tend to have a average maturity that is
longer than Liquid and Ultra Short Term Funds but shorter than pure Income
Funds.
These funds tend to perform when short term interest rates are high and
could potentially benefit from capital gains as liquidity comes back to the
market and interest rates go down.
These funds are suitable for conservative
investors who have low to moderate risk taking appetite and an investment
horizon of 9 to 12 months.
5. Income Funds, Gilt
Funds and other dynamically managed debt funds
These funds comprise
of investments made in a basket of debt instruments of various maturities &
issuers. These funds are suitable for investors who willing to take a
relatively higher risk as compared to corporate bond funds,and have longer
investment horizon.
These funds tend to work when entry and exit are timed
properly; investors can consider entering these funds when interest rates have
moved up significantly to benefit from higher accrual and when the outlook is
that interest rates would decrease.
As interest rates go down, investors can
potentially benefit from capital gains as well. A few types of dynamically
managed debt funds are mentioned below -
· A. Income
funds invest in
corporate bonds, government bonds and money market instruments. However, they
are highly vulnerable to the changes in interest rates and are suitable for
investors who have a long term investment horizon and higher risk taking
ability.
Entry and exit from these funds needs to be timed appropriately. The
correct time to invest in these funds is when the market view is that interest
rates have touched their peak and are poised to reduce.
· B. Gilt Funds invest in
government securities of medium and long term maturities issued by central and
state governments. These funds do not have the risk of default since the issuer
of the instruments is the government.
Net Asset Values (NAVs) of the schemes
fluctuate due to change in interest rates and other economic factors. These
funds have a high degree of interest rate risk, depending on their maturity
profile. The higher the maturity profile of the instrument, higher the interest
rate risk.
· C. Dynamic
Bond Funds invest in debt
securities of different maturity profiles. These funds are actively managed and
the portfolio varies dynamically according to the interest rate view of the
fund managers. These funds Invest across all classes of debt and money market
instruments with no cap or floor on maturity, duration or instrument type
concentration.
6. Corporate Bond Funds..!
These funds invest
predominantly in corporate bonds and debentures of varying maturities that
offer relatively higher interest, and are exposed to higher volatility and
credit risk.
They seek to provide regular income and growth and are suitable
for investors with a moderate risk appetite with a medium to long term
investment horizon.
8. Close Ended Debt Funds..
·
Fixed
Maturity Plans (FMPs) are closed ended
Debt Mutual Funds that invest in debt instruments with a specific date of
maturity that is less than or equal to the maturity date of the scheme.
Securities are redeemed on or before maturity and proceeds are paid to the
investors.
FMPs are similar to
passive debt funds, where the portfolio manager buys and holds the debt
securities for the entire duration of the product. FMPs are a good option for
conservative investors, as they do not carry any interest rate risk provided
the investor stays invested until the maturity of the product. They are also a
tax efficient investment option.
9. Hybrid / Balance Funds..!
They bridge the gap
between equity and debt schemes by investing in a mix of equity and debt
securities.
This adds a considerable amount of risk to the product and will
suit investors looking for commensurate returns with higher levels of risk than
regular debt funds.
· A. Monthly
Income Plans (MIPs) strive to offer
the benefit of diversification across asset classes by investing a proportion
of the portfolio in debt securities (70% to 95%) with a smaller allocation in
equity securities (5 % to 30 %).
As the correlation
between prices of equity and debt is low, this product endeavors to give an
investor returns that are relatively higher than debt market returns.
MIPs can
be classified as debt oriented hybrids that seek to -
o generate income from the debt securities maximise the benefits of long term growth from
equity securities aim for periodic distribution of dividends
However, an important
point to be noted is that monthly income is not assured and it is subject to
the availability of distributable surplus in the fund.
·
B. Capital
Protection Oriented Funds are
closed ended funds that are hybrid in nature; they allocate money to debt and
equity securities. The allocation to debt securities is done in such a way that
at the end of the term of the product, the value of debt investment is equal to
the original investment in the fund. The equity portion aims to add to the
returns of the product at maturity. These funds are oriented towards protection
of capital and do not offer guaranteed returns.
Say, for example, AAA
bonds are quoting at interest rate of 10% p.a. for a 5 year term.
o
This means that at the end of 5 years, the investment
of Rs. 100 in such bonds would be worth Rs. 161.05, assuming reinvestment of
the interest.
o On the other hand, if one invests Rs. 62.09 in
such bonds, the value of the bonds at the end of 5 years would be Rs. 100.
In such a case, the
allocation between equity and debt would be 38 : 62 respectively. So, if the equity value
reduces to zero, the investor gets back the original amount invested.
The asset allocation
is a function of prevailing interest rates on high quality (AAA rated) bonds.
It is mandatory for the fund to be rated by at least one rating agency in order
to be called a capital protection oriented fund. Debt securities held in the
portfolio must be of highest rating.
· C. Multiple
Yield Funds are close ended
income funds that aim to optimize income from debt securities and potential
growth from equity.
They aim to limit the downside by investing in rated debt
instruments of reputed issuers. Through a limited equity exposure, they aim to
provide capital appreciation by investing in shares of companies without any
sector or market capitalization bias. This exposure will help to participate in the growth of these companies thus seeking to provide the portfolio with an element of potential long term capital appreciation.
More details and Investing
Mr. S.Sridharan, Founder, https://www.walletwealth.co.in/
If you need any advice on investments, do call us at 9940116967.
Team Wallet Wealth,
AMFI Registered Mutual Fund Distributor
2nd Floor, No.8A, 2nd Main Road, Nanganallur,
Chennai – 600 061
Ph: 044-48612114
https://www.walletwealth.co.in/
Email id : sridharan@walletwealth.co.in
You can contact Mr.S.Sridharan for all types of investments including mutual fund investment, medical insurance, and life insurance.
Read articles written by Mr. S. Sridharan in Nanayam Vikatan, a leading personal financial management magazine.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The past performance of the mutual funds is not necessarily indicative of future performance of the schemes.
