What are Debt Funds?
Debt funds are mutual fund schemes that invest in fixed income securities and money market instruments such as treasury bills, commercial papers, corporate bonds, government bonds etc.
Debt funds provide relatively stable returns and thereby can be used for short to medium-term savings and liquidity.
There are various types of debt funds such as:
Liquid Funds:
They invest in bonds and money market instruments having residual maturity up to 91 days,
They offer very low volatility and minimal interest-rate sensitivity.
Ultra Short Duration Funds:
They invest in fixed income instruments having portfolio duration of 3 to 6 months.
They offer low volatility and low interest rate sensitivity due to the short-term bond portfolio.
Low Duration Funds:
They invest in fixed income instruments having portfolio duration of 6 to 12 months.
Short Duration Funds:
They primarily invest in fixed income securities with portfolio duration ranging from one to three years.
Medium Duration Funds:
They primarily invest in fixed income securities with portfolio duration ranging from three to four years.
Given their focus on instruments with medium duration, they are more sensitive to interest rate risk than funds having shorter duration.
Credit Risk Funds:
They predominantly invest in corporate bonds which are below the highest rating.
These funds aim to generate higher yield, but also carry higher credit risk as compared to other debt funds.
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