A debt fund is a Mutual Fund scheme is an ideal investment option for parking surplus funds for short term. The fund invests mainly in fixed income instruments for regular and fixed income. Corporate and government bonds, money market instruments and corporate debt securities are the prominent investment instruments under debt fund scheme.
Securities and Exchange Board of India (SEBI), the regulator of mutual funds in India vide its circular SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017, redefined the characteristics and norms of all mutual fund schemes including that of debt funds to ensure uniformity in the features of similar schemes launched by different mutual fund houses. The revised norms are announced to ensure convenience to the investor to evaluate features and returns of different schemes to take informed investment decision.
Debt Fund Scheme- What is it?
A debt fund scheme invests major portion of the fund in debt instruments with relatively high liquidity, good safety and stable returns. This scheme is best suited for risk averse investors who target regular income. Due to the features of the scheme, debt funds are also known as bond funds or income funds. Compared to equity mutual fund schemes, debt funds are less volatile and less risky. Operations of debt fund are similar to equity funds, but safety of capital is more in debt funds.
A debt fund is similar to bank deposits which also offer steady returns with low volatility. Debt fund, however, offer better tax efficiency compared to bank deposits. Debt funds are best suited for those investors who prefer safety of capital and / or regular income from investment and also when the horizon of investment is short.
There are variety of investment options for debt fund investment. Liquid fund, money market fund, gilt fund, corporate bond fund, floater fund etc are some of them.
Debt Fund Scheme – Norms for scheme categorization and their characteristics
The revised norms for scheme categories under debt mutual fund scheme and the characteristics are as shown below:
|
Sl No |
Category of debt fund |
Scheme Characteristics |
Debt fund scheme feature description |
|
1 |
Overnight Fund** |
Investment in overnight securities having maturity of 1 day |
An open ended debt scheme investing in overnight securities |
|
2 |
Liquid Fund $ ** |
Investment in Debt and money market securities with maturity of up to 91 days only |
An open ended liquid scheme |
|
**Provisions of SEBI Circular No SEBI/IMD/DF/19/2010 dated November 26, 2010 must be followed for Uniform cut-off timings for applicability of Net Asset Value (NAV). $ All provisions mentioned in SEBI circular SEBI/IMD/CIR No.13/150975/09 dated January 19, 2009 in respect of liquid schemes continue to be applicable |
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3 |
Ultra Short Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months – 6 months |
An open ended ultra-short term debt scheme investing in instruments with Macaulay duration between 3 months and 6 months |
|
4 |
Low Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months- 12 months |
An open ended low duration debt scheme investing in instruments with Macaulay duration between 6 months and 12 months |
|
5 |
Money Market Fund |
Investment in Money Market instruments having maturity upto 1 year |
An open ended debt scheme investing in money market instruments |
|
6 |
Short Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year – 3 years |
An open ended short term debt scheme investing in instruments with Macaulay duration between 1 year and 3 years |
|
7 |
Medium Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 years – 4 years |
An open ended medium term debt scheme investing in instruments with Macaulay duration between 3 years and 4 years |
|
8 |
Medium to Long Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 – 7 years |
An open ended medium term debt scheme investing in instruments with Macaulay duration between 4 years and 7 years |
|
9 |
Long Duration Fund |
Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is greater than 7 years |
An open ended debt scheme investing in instruments with Macaulay duration greater than 7 years |
|
10 |
Dynamic Bond |
Investment across duration |
An open ended dynamic debt scheme investing across duration |
|
11 |
Corporate Bond Fund |
Minimum investment in corporate bonds- 80% of total assets (only in highest rated instruments) |
An open ended debt scheme predominantly investing in highest rated corporate bonds |
|
12 |
Credit Risk Fund^ |
Minimum investment in corporate bonds- 65% of total assets (investment in below highest rated instruments) |
An open ended debt scheme investing in below highest rated corporate bonds |
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Words/ phrases that highlight/ emphasize only the return aspect of the scheme like Credit Opportunities Fund, High Yield Fund, Credit Advantage etc shall not be used in the name of the scheme. |
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13 |
Banking and PSU Fund |
Minimum investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions- 80% of total assets |
An open ended debt scheme predominantly investing in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions |
|
14 |
Gilt Fund |
Minimum investment in Gsecs- 80% of total assets (across maturity) |
An open ended debt scheme investing in government securities across maturity |
|
15 |
Gilt Fund with 10 year constant duration |
Minimum investment in Gsecs- 80% of total assets such that the Macaulay duration of the portfolio is equal to 10 years |
An open ended debt scheme investing in government securities having a constant maturity of 10 years
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16 |
Floater Fund |
Minimum investment in floating rate instruments- 65% of total assets |
An open ended debt scheme predominantly investing in floating rate instruments |
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