In India, exposure to the Bond or Debt market is minimal when compared to other countries. Most people around the world, plan and create their portfolio as 50% Equity and 50% Debt market. The reason behind this is, buying a single face value of the bond in some lakhs, which is not affordable by most of us in India. So, people who have an idea to invest in the bond market can prefer debt funds where diversification and liquidity are in high mark than bonds.



          Debt funds are a type of mutual funds that are invested in the securities like the central, state a government bond, G- Sec, Corporate bonds, Treasury bill, NCDs, Commercial papers, etc. As it is a mutual fund, it has a diversification of bonds and different tenure, so the risk associated will be even lesser when compared to the bond market. It provides us a fixed income across the years we continue. One of the best place to invest after equity to overcome from being a threat to inflation.

          The investor who is away from market volatility, can prefer debt fund as their investment tool.



          There are different types of Debt Funds which are invested in different securities and bonds with changes in tenure of investments. We shall discuss this in detail.


          GILT Funds is investing in G-Sec bonds, the highest-rated government bonds. It has zero credit and liquidity risk, the only risk involved is the interest rate risk. This bond should be held for more than 7 years. The average return of a 10-years bond is 9-12% per annum, which is nearly equal to equity. There is volatility in the GILT fund, which is dominated by the change in interest rate. In Gilt funds, 80% of the fund has to be parked only in G-Sec bonds.



         The bonds with single day maturity are diversified as overnight funds. The average return of the fund is about 5-6% per annum. As, it is a single day maturity period, people who need their capital to be safe and with an interest rate which is better than a savings account can choose overnight funds.



          This is a type of funds which include,  investments in treasury bills, RBI bonds, NCD’s and other types of corporate bonds with 91 days maturity. Since the maturity period is about 3 months, the risk is very minimal compared to all types of debt and equity mutual funds. Emergency funds can be accumulated by these funds. The average return which we can earn is 7-8% per annum, which is better than FD, RD, Post office savings scheme, and Bank. If the fund is redeemed within 7 days, the exit load will be 0.07%.



          The funds which are invested over the bonds or commercial papers with a 3-6 month maturity period are termed as the ultra-short fund. This fund is also associated with very low risk. The average return is higher than liquid funds with a yield of 8-9% interest per annum. The only risk is when the fund has corporated bonds that too with CRISIL Rating A and lesser. The main advantage of ultra-short-term funds has zero exit load.



          This fund holds bonds with a 1-3 year maturity period, is associated with low risk as it lends funds to the bank and corporate bonds with ratings in mind. The 3-year return is on average of 5.5-6.5% per annum. Before investing in such funds, please go through the allocation of bonds and their percentage of investments the fund manager does and calculate your risk.



          Dynamic bond funds have the allocation of both short term and long term bonds, in the concepts of averaging the risk and reward. This minimizes the risk of interest rate fluctuation in near terms. The maturity period will be in the mixture of 3-7 years. There is some interest rate risk involved in dynamic bonds. The average return of dynamic bond funds is 7.5-8.5% for 5 years.



          Corporate bond funds should have a minimum of 80% of its allocation in corporate bonds. Corporate bonds can yield a high return, as well as risk is also associated with it, anyhow it has to be invested in high CRISIL/CARE rated bonds only to minimize the risk involved. When it invests in low-grade funds, the risk increases.



          The fund with 65% of Low-grade corporate bonds is called as credit risk funds. Unlike other debt funds it can yield high returns but the risk is high relatively equal to equity. It can be used as an investment option when countries economy is in good shape.



          In the above-classified debt fund types, we have understood the characteristic of debt funds. Now, it is our choice to pick the correct debt fund for the right portfolio management.

          We will be investing in debt funds only in a short to medium duration of 1-5 year, maximum of 7 years. In such a case, our aim of investment return should not be equal to equity. We have to be satisfied while traveling along with the inflation which is much more needed. We can classify into two categories of investment.

1.    Investment for less than 5 years.

2.    Investment between 5-10 years.


Investment for less than 5 years:

          In Investment less than 5 years, our objective will be very low risk and has a decent return, after understanding over the types of debt funds. The preferable funds are liquid funds and Ultra short term funds. Other than these two types of funds, there are fluctuation and some kind of volatility is found. Also, when the fund manager invest in low graded bonds, the credit risk increases.

          Let me show with an example of Ultra Short Term Fund, which provides 5 years return of 9.04% per annum.



In the above image, you can see the type of steadiness increases in NAV, this shows how ultra-short-term funds and liquid funds have a fixed income. There are some risks related to these funds too, which can be seen later in this subject.

Benefits of Liquid Funds and Ultra Short Term Funds:

·       Emergency Funds can be accumulated using these funds as the liquidity and credit risk are at very low risk and returns nearly 7.5-9% which will be equal to inflation

·       Most of the school collects yearly fees, so the school fees can be invested in these funds and can be redeemed when it is needed.

·       Medical Insurance which is paid annually can be invested via Liquid and Ultra Short Term Funds.

·       The main advantage of these funds are high liquidity and low risk.

Investments more than 5 years:

When it comes to more than 5 years, there are two options on investment. Equity while economic conditions are good or investing in debt funds to get a decent return.

GILT Fund will be the choice of investment when it comes to debt, as it invests 80% of the funds in high grated government G-Sec bonds which have zero credit and liquidity risk, investors will be benefited to hold the investments for more than 5 years in Gilt Funds.



·       When the company fails to pay out its debts back, the credit risk increases and the NAV falls all of sudden. Eg, This January all Franklin Templeton debt fund’s NAV fell down to nearly 5% in a single day, investors have a terrible mindset on what really happened. This is because Vodafone, Idea failed to pay off its debt.

·       When Fund size is less than 1000crores, there is a chance of high risk in NAV fall when the majority of investors redeem their investments. This March, when Covid-19 was declared pandemic and lockdown was announced, all the investors took their money from debt funds and all funds saw a shortfall in NAV.

·       Other risk is Interest rate risk, which is highly associated with Bonds with more than 3 years of the lock-in period.



·       Debt funds are suitable for investors who likely to get return more the traditional way of savings.

·       People who want to invest in the bond market, but don’t have sufficient amount as Lumpsum or required liquidity, at any time, can go for debt funds.

·       The risk with debt funds are low when compared to equity.

·       Ensure you invest in the funds holding High CRISIL rated bonds or Government bonds.

·       Don’t be greedy in investment seeing 1-year growth, invest in funds which have no risk and average growth.

·       Plan your goals and allocate it towards your funds, Less than 5 years tenure of any goal debt funds will the best choice.




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