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What are Debt Funds?
Debt funds predominantly invests in fixed income securities like Government securities, corporate bonds, debentures, etc. The debt market is very important for both the corporates and the government who are looking to raise money and for investors looking to create diversified portfolios.
Currently, there are many debt schemes in the market that vary with respect to the various instruments they invest in, their duration, the risk profile of the investment and the return potential. This makes it important for the investor to know and understand the specifics of each kind of debt scheme. Following is the list of various types of debt schemes available in the market for investors as per SEBI (Mutual Funds) Regulations, 1996:
Overnight Funds: These open ended debt schemes invest in overnight securities that have a maturity of 1 day. Generally, these schemes are considered to be the least risky since the papers carry no duration risk.
Liquid Funds: These funds invest in debt and money market securities with a maturity up to 91 days.
Ultra-short duration Funds: These open-ended schemes invest in debt and money market securitiessuch that the Macaulay duration of the portfolio is between 3 months to 6 months.
Low duration Funds: These open ended debt schemes invest in debt and money market securities such that the Macaulay duration of the portfolio is between 6 months to 12 months.
Money Market Funds: These open ended debt schemes invest in money market instruments with a maturity up to 1 year.
Short Duration Funds: These open ended debt schemes invest in debt and money market securities such that the Macaulay duration of the portfolio is between 1 year to 3 years.
Medium Duration Funds: These open ended debt schemes invest in debt and money market securities such that the Macaulay duration of the portfolio is between 3 years to 4 years.
Medium to Long Duration Funds: These open ended debt schemes invest in debt and money market securities such that the Macaulay duration of the portfolio is between 4 years to 7 years.
Long Duration Fund: These open ended debt schemes invest in debt and money market securities such that the Macaulay duration of the portfolio is greater than 7 years.
Dynamic Bond Funds: These open ended debt schemes invest in debt and money market securities across durations. These are dynamic in terms of the composition and maturity profile.
Corporate Bond Funds: A corporate bond fund is an open-ended debt scheme which invests at least 80% of its total assets in highest-rated corporate bonds.
Credit Risk Funds: These open ended debt schemes predominantly invest in corporate debt instruments that fall just below the highest credit rating. As per SEBI guidelines, the scheme should allocate minimum 65% assets to such corporate debt instruments.
Banking and PSU Funds: These open ended debt scheme predominantly invest in debt instruments issued by banks, public sector undertaking and public financial institutions. As per SEBI guidelines, the fund should allocate minimum 80% assets to the above-mentioned debt instruments.
GILT Funds: These open ended debt schemes predominantly invest in government securities. As per SEBI guidelines, the fund should allocate minimum 80% assets to government securities across maturities.
GILT Funds with 10-year constant duration: These open ended debt schemes predominantly invest in government securities such that the constant maturity of the portfolio is equal to 10 years. As per SEBI guidelines, the fund should allocate minimum 80% assets to such government securities.
Floater Funds: These open ended debt schemes predominantly invest in floating-rate instruments. As per SEBI guidelines, the fund should allocate minimum 65% assets to floating rate instruments.
Debt funds are available across the risk-return spectrum and investor should understand the investment mandate of each scheme before making an investment decision.
SEBI- The Securities and Exchange Board of India is the regulator of the securities and commodity market in India owned by the Government of India.
Debenture - A debenture is a medium-to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest.Debentures are not usually secured by any physical asset. During liquidation, senior debentures get payment before junior debentures. It is also known as an unsecured loan.
Convertible debentures- Same as debentures but they can be converted into common/equity shares of the issuing company after a predetermined period of time.
Government bonds - A government bond or sovereign bond is a bond issued by a national government, generally with a promise to pay periodic interest payments called coupon payments and to repay the face value on the maturity date. The aim of a government bond is to support government spending.They are considered risk free as they are issued by the government. They offer low return because of low risk.
Commercial Paper - Short-term unsecured loans are a promissory note with a fixed maturity of rarely more than 270 days issued by large corporations to meet short-term debt obligations.
Certificate of deposit - It is a financial instrument where an investor can deposit money in the bank to get a higher amount in the future. It usually has a fixed maturity and interest rate. It is generally considered risk free and offers a low return on the amount invested.
Corporate bond - A fixed income instrument used by corporations to raise money from the market for a variety of reasons such as to ongoing operations, M&A, or to expand business. They offer a higher rate of interest compared to government securities as they carry high risk as compared to government securities. The risk associated with the corporate bond and the subsequent return is captured in the bond rating. The bond rating is given by various rating agencies. A bond with a higher rating is considered less risky and offers less return and vice-versa.
Treasury Bills - Treasury bills are instrument of short-term borrowing by the Government of India , issued as promissory notes under discount. The interest received on them is the discount, which is the difference between the price at which they are issued and their redemption value.
Credit Rating - It is the credit risk associated with the entity which is taking debt from the market. It is based on their ability to repay the debt. "AAA" and "AA" (high credit quality) and "A" and "BBB" (medium credit quality) are considered investment grade. Credit ratings for bonds below "BB," "B," "CCC," etc. are considered low credit quality, and are commonly referred to as "junk bonds."A high rating of AAA suggests a very low risk and low rating suppose BBB suggests high risk. A low-risk entity is required to give low interest in raising debt from creditors and vice versa.
Maturity - Refers to the final date of payment of loan or expiration date of a debt instrument. A bond is terminated after its maturity and the entity is expected to pay all the payments before expiration.
Macaulay duration - The Macaulay duration for a portfolio is calculated as the weighted average time period over which the cash flows on its bond holdings are received. It is measured in years.
It is mandatory for all mutual fund investors to undergo a one-time KYC (Know Your Customer) process. For more info on KYC specifically on: the procedure for completing KYC, for changing address details, for changing contact details.
For changing bank details, visit barodabnpparibasmf.in/investor-centre/information-on-kyc
For more info on submitting a complaint or a grievance, visit https://www.barodabnpparibasmf.in/contact-us
Further, investors should ensure that they transact ONLY with SEBI Registered Mutual Funds listed under Intermediaries/Market Infrastructure Institutions on the SEBI website https://www.sebi.gov.in/intermediaries.html
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
**basis portfolio of the Scheme as on January 31, 2024
*Investors should consult their financial advisers if in doubt about whether the product is suitable for them
**Basis constituents of the scheme as on January 31, 2024
*The PRC matrix denotes the maximum risk that the respective Scheme can take i.e. maximum interest rate risk (measured by MD of the Scheme) and maximum credit risk (measured by CRV of the Scheme)
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