Types of Debt Funds in India

Understanding Debt Funds

Debt funds are mutual funds that invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, and commercial papers.
They are often called income funds or bond funds, and are generally less volatile than equity funds.

Because they invest in instruments with fixed maturity periods and interest rates, debt funds in India are seen as relatively low-risk. They’re suitable for those looking to balance safety, liquidity, and moderate growth.

Why Investors Choose Debt Funds

• Stability: Less affected by market fluctuations compared to equity funds.

• Liquidity: Many categories allow easy redemption, unlike fixed deposits.

• Flexibility: Wide range of options based on investment duration and risk.

• Diversification: Debt funds spread investments across instruments and issuers.

They’re especially useful for conservative investors or those looking to park surplus funds efficiently.

All Types of Debt Funds in India

According to SEBI’s classification, here are the main types of debt funds:

1. Overnight Funds

Invest in one-day maturity instruments, suitable for very short-term parking of funds.

2. Liquid Funds

Invest in money market instruments with a maturity of up to 91 days, ideal for emergency or idle cash.

3. Ultra-Short Duration Funds

Hold securities with maturities of 3–6 months, slightly higher returns than liquid funds.

4. Low Duration Funds

Invest in debt securities with maturities between 6–12 months, a good short-term option.

5. Money Market Funds

Focus on instruments maturing within one year, offer balance between liquidity and returns.

6. Short Duration Funds

Invest in securities with 1–3 years maturity, suitable for investors with short investment horizons.

7. Medium Duration Funds

Hold securities with maturities of 3–4 years, moderate risk and return potential.

8. Medium-to-Long Duration Funds

Invest in papers maturing within 4–7 years  suitable for medium-term goals.

9. Long Duration Funds

Focus on long-term instruments (7+ years)  higher interest rate sensitivity.

10. Corporate Bond Funds

Invest at least 80% in high-rated corporate bonds  aim for safety and steady income.

11. Credit Risk Funds

Invest a minimum of 65% in lower-rated corporate bonds  carry higher risk but potentially higher returns.

12. Banking & PSU Funds

Invest mainly in debt securities issued by banks, public sector undertakings (PSUs), and public financial institutions  relatively secure.

13. Gilt Funds

Invest primarily in government securities virtually no credit risk but sensitive to interest rate movements.

14. Gilt Fund with 10-Year Constant Duration

Maintain an average maturity of 10 years  suitable for long-term investors who can handle volatility.

15. Floater Funds

Invest at least 65% in floating-rate instruments  returns adjust with market interest rate changes.

16. Dynamic Bond Funds

Actively manage portfolios across durations depending on interest rate outlook flexible and dynamic.

How to Choose Among Different Types of Debt Funds

When selecting from these types of debt funds in India, consider:

• Investment horizon: Choose short-duration funds for short-term goals and long-duration for long-term stability.

• Risk appetite: Higher duration or credit risk funds may offer higher returns but with greater volatility.

• Goal alignment: Match each fund type with your specific needs, emergency savings, income generation, or capital preservation.
  
  

Final Word

Debt funds bring structure and stability to your portfolio. By understanding all types of debt funds, you can make informed decisions that balance safety and growth, whether you’re parking funds short-term or planning for medium-term financial goals.