Module 4 : Debt Funds
Debt Fund Categories
Debt Fund Categories
Fixed Income or debt fund schemes invest in money market or debt securities of different maturities and credit risk profiles. Money market securities include Collateralized Lending and Borrowing Obligation (CBLOs), Commercial Papers (CPs), Certificates of Deposits (CDs), Treasury Bills etc. Debt market securities include Corporate Bonds and Government Bonds of different maturities. Before we discuss different types of debt funds, it is important to understand the following terms:-
- Maturity: Debt and money market securities are issued for a fixed tenure. Upon maturity of the security, the issuer (borrower) pays back the principal to the investor (lender).
- Macaulay Duration: The Macaulay duration is the weighted average term to maturity of the cash flows from a fixed income security. Macaulay Duration depends on the maturity and the cash-flows (coupons) of the bond. It also reflects the interest rate risk of the bond.
- Credit rating: Credit rating agencies assess credit risk (failure to pay interest / principal) of debt or money market instruments and assign ratings which reflect the implicit risk.
- Issuer: Issuer is the borrower. The issuer can be the Government, a company or a financial institution.
Debt fund categories
SEBI has mandates for maturity / duration, issuer profiles and credit rating profiles for different types of debt mutual funds.
|
Category |
Maturity / Duration1 |
Issuer Profile |
Credit Rating Profile |
|
Overnight Funds |
Maturity: Overnight |
No restriction |
No restriction2 |
|
Liquid Funds |
Maturity: Less than 91 days |
No restriction |
No restriction |
|
Ultra-short duration Funds |
Duration: 3 to 6 months |
No restriction |
No restriction |
|
Low duration Funds |
Duration: 6 to 12 months |
No restriction |
No restriction |
|
Money market funds |
Duration: Less than 12 months |
No restriction |
No restriction |
|
Short duration funds |
Duration: 1 to 3 years |
No restriction |
No restriction |
|
Medium duration funds |
Duration: 3 to 4 years |
No restriction |
No restriction |
|
Medium to long duration funds |
Duration: 4 to 7 years |
No restriction |
No restriction |
|
Long Duration funds |
Duration: 4 to 7 years |
No restriction |
No restriction |
|
Dynamic bond funds |
No restriction (across durations) |
No restriction |
No restriction |
|
Corporate bond funds |
No restriction |
No restriction |
At least 80% of assets only in highest rated securities |
|
Credit risk funds |
No restriction |
No restriction |
At least 65% of assets in securities below highest rating |
|
Banking and PSU funds |
No restriction |
At least 80% of assetsin securities issued by Banks, PSUs and PFIs3 |
No restriction |
|
Gilt Funds |
No restriction |
At least 80% of assets in Government Securities |
G-Secs have sovereign guarantee |
|
Gilt Funds with 10 year constant duration |
Duration: 10 years |
At least 80% of assets in Government Securities |
G-Secs have sovereign guarantee |
Source: SEBI Circular, 6th October 2017. Notes: (1) Duration refers to Macaulay Duration. (2) Overnight funds invest primarily in CBLOs are backed by collateral in form of G-Secs. Hence credit risk is very low. (3) PSUs and PFIs enjoy quasi sovereign status as their majority ownership is with the Government. Banks are regulated by RBI which strives to ensure capital adequacy to meet all debt obligations. Credit risk of these funds is usually low.
Apart from the above types of debt mutual funds or debt fund categories, there is another category known as Floater Funds. Floater funds must invest 80% of their assets in floating rate securities. Floating rate securities do not pay fixed coupons (interest); their interest payments are variable and tied to a benchmark index e.g. MIBOR.