To make investment and fund objective simpler, SEBI has defined criteria for each fund and group the funds based on the strategy and investment duration. Previous post, we discussed about equity mutual funds. In this post, we would discuss newly updated debt and hybrid mutual funds categories and it objectives.
Debt Mutual funds :
SEBI has classified debt funds based on strategy and time horizon. Debt mutual funds invest in bonds of companies who need funds for business as a loan or invest in securities issued by the Government. Debt mutual funds return predetermined interest rate which the mutual fund earns and then passes on to the investors either through dividends or by way of growth in the value of the investment.
Ensure 20% – 30% of your mutual funds investment in debt mutual funds for better diversification.
Debt mutual funds is good to keep your emergency funds. Investors who are not looking for aggressive return and minimal risk investment, debt mutual funds is best investment. Debt mutual funds returns are better than fixed deposit. Debt mutual funds can be withdrawn at any point of time. There is no lock-in period.
Debt mutual funds returns are better than fixed deposit.
The debt funds classified into long term, short term, ultra short term and liquid funds.
Long term debt funds : These mutual funds select bonds/debt for investment such that average maturity (remaining) period for portfolio is higher than 7 years. This category requires a holding period of at least three years. These funds are good for long term investment, not for short term.
Short term debt funds : These mutual funds select bonds/debt for investment such that average maturity (remaining) period for portfolio is between 1 to 3 year. These funds should be used when you have a holding period of above 1 year. This time frame requires low risk funds which can provide stable returns.
Debt mutual funds is good to keep your emergency funds.
Ultra short term debt funds : These funds which are suitable for holding periods between 6 months to 1 year. These are low volatile funds with shorter maturity. These funds can be used to park money which you will need in the very near future or emergency funds.
Liquid funds : These mutual funds invest in bonds and money market instruments with maturity no longer than 91 days . Liquid funds can be used to parking money for really short term requirements such as a few days up to 6 months. These funds have maturity up to 91 days and least volatile. Overnight and liquid funds fall under this category.
Gilt Fund: These mutual funds invest mostly in government bonds. Government bonds are considered the safest investment in the country.
For investors who do not take credit risk, stick with a gilt fund (Government securities fund).
Hybrid Mutual funds:
Funds which hold instruments from more than one asset classes will fall under hybrid category. The two most popular categories under hybrid are Balanced funds and Monthly Income Plans (MIPs).
Balanced funds : Balanced funds invest predominantly in equity (at least 65%) and the rest in debt will now be called Aggressive Hybrid funds.
Monthly Income Plans(MIPS) : MIPs which invest predominantly in debt (at least 75%) and the rest in equity will now be called Conservative Hybrid funds.
Dynamic Asset Allocation : Dynamic Asset Allocation manages between equity and debt.
Multi Asset Allocation : These mutual funds invest in at least 3 asset classes with at least 10% in each asset classes. Assets will include a third asset class, like gold, commodities,etc. These mutual funds invest in both Stocks and Debt/Bonds. Allocation between debt and socks can vary as per market conditions.
Equity savings funds : These funds have a minimum of 65% in equity and the rest in debt but a portion of their equity will be hedged making it less riskier than aggressive hybrid funds.
Balanced Hybrid funds : These funds have about half their investments in equity and half in debt. This cushion of debt portion brings it in the bottom end of the risk spectrum after Conservative Hybrid funds.
MorningStar and ValueResearch do provide Debt mutual fund stars, which can be quite useful.
Gilt Funds – For short horizon of less than 6 months
Liquid funds – For time horizon of upto 1 year.
Ultra Short term funds – For time horizon of 1 to 2 years.
Short term funds – For time horizon of 2 to 3 years.
Long term funds – For time horizon of greater than 3 years.
]Top Debt mutual funds :
Here top debt mutual funds suggested by cleartax for your reference.
|Fund Name||3 year||5 year|
|Reliance Low Duration||7.44%||7.99%|
|Aditya BSL Savings Fund||7.96%||8.50%|
|UTI Treasury Advantage Institutional Growth||7.70%||8.25%|
|L&T Low Duration Fund Growth||9.38%||8.78%|
|DSP Credit Risk Fund Regular Growth||6.18%||7.81%|
|Aditya Birla Sun Life Medium Term Plan||7.69%||8.97%|
|UTI Short Term Income Fund Institutional Growth||7.30%||8.21%|