Debt funds witnessed a significant outflow in March 2024, amounting to around ₹1.98 lakh crore, as per data released by the Association of Mutual Funds in India (AMFI) on April 10. All debt funds categories witnessed outflow except for long-duration funds, banking, PSU, and Gilt funds with a 10-year constant duration.
What are debt funds?
Debt funds are a type of mutual fund schemes through which investments are made in fixed-income instruments like corporate and government bonds, corporate debt securities, money market instruments, and more. Debt funds are also known as Income Funds or Bond Funds.
Also read | Mutual Funds: Net AUM declines marginally to ₹53 lakh crore in March, shows AMFI data
How do debt funds work?
The investment made via debt funds goes into instruments like corporate bonds, government bonds, corporate debt securities, and money market instruments. It is relatively less volatile compared to the equity market and is seen as a regular income source.
Additionally, debt funds also get periodic interest from the underlying debt instruments in which they invest, and this interest income gets added to a debt fund on a daily basis. The net asset value (NAV) of a debt fund depends on the interest rates of its underlying assets, and also on any upgrade or downgrade in the credit rating of these assets.
Also Read | Smallcap funds see outflow for first time in 2.5 years
The market price of debt funds vary with changes in interest rates.
What are the types of debt funds?
Debt funds are divided into different types based on their investment strategies and the securities they invest in. Here are some common types of debt funds.
Short-term funds: Funds investing in debt securities with maturities of 1 to 3 years. These primarily include government securities, corporate debt, and money market instruments. They are suitable for investors with low to moderate-risk appetite, and tend to perform better in high-interest-rate environments.
Ultra-short-term funds: These funds have a maturity period of less than a year. They invest in a mix of ultra-short-term debt securities with a small portion potentially allocated to long-term securities. Ideal for investors with a 1-12 month investment horizon, these funds offer low risk.
Income funds: These funds invest in debt securities with varying maturity periods, with a focus on long-term holdings. They typically invest in government securities and corporate bonds. Income funds are suitable for investors with a slightly higher risk tolerance and a longer investment horizon.
Liquid funds: With a very low maturity period of 91 days, liquid funds invest in highly liquid instruments such as Treasury Bills and Certificates of Deposit (CDs). They offer high liquidity and provide stable, albeit minimal, returns.
Dynamic bond funds: These funds dynamically manage their portfolio across long-term and short-term debt instruments with varying maturity profiles. They invest in all classes of debt and money market instruments. Dynamic bond funds are suitable for investors with a medium to high-risk appetite.
Gilt funds: These funds invest exclusively in government securities issued by central and state governments. The maturity periods of these securities range from medium to long-term. Gilt funds are considered low-risk investments as they carry no credit risk and aim to preserve capital.
Fixed Maturity Plans (FMPs): FMPs are closed-end debt funds with a fixed lock-in period ranging from a few months to several years. The investment strategy remains fixed during the tenure, and returns are not affected by changing interest rates. FMPs are considered tax-efficient and often viewed as an alternative to fixed deposits.
Credit opportunity funds: These funds invest in a broad range of debt instruments, from short-term to long-term, with the objective of maximizing returns. They are suitable for investors seeking potentially higher returns, who are comfortable taking additional risks.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it’s all here, just a click away! Login Now!
Download The Mint News App to get Daily Market Updates.
Published: 11 Apr 2024, 11:16 AM IST