What are the categories of debt mutual funds?

"Know what you own, and know why you own it." — Peter Lynch

Debt mutual funds are an investment option primarily investing in fixed-income securities such as government bonds, corporate bonds, debentures and money market instruments. These funds are preferred by investors who seek to earn a steady income and prefer relatively lower risks. Debt mutual funds are classified into different categories based on their investment objectives, portfolio composition and maturity profile. 

This blog will discuss the different categories of debt mutual funds.

1. Liquid Funds: Liquid funds are a type of mutual debt fund that invests in highly liquid money markets instruments such as commercial papers, treasury bills and certificates of deposit. These funds have a maturity period of up to 91 days, making them ideal for investors looking to park their short-term funds. Liquid funds are relatively low-risk and offer better returns than traditional savings accounts.
2. Ultra Short Duration Funds: Ultra short-duration funds are debt mutual funds that invest in debt and money market instruments with a maturity period of up to 1 year. These funds aim to provide higher returns than liquid funds while maintaining a low-risk profile.
   
3. Low Duration Funds: Low duration funds invest in debt and money market instruments with a maturity period of 6 months to 1 year. These funds offer a slightly higher risk profile than liquid funds but aim to provide higher returns in the medium term.
   
4. Short-Duration Funds: Short-duration funds invest in debt and money market instruments with a maturity period of 1 to 3 years. These funds offer a higher risk profile than low-duration funds but aim to provide higher returns in the medium term.
   
5. Medium Duration Funds: Medium duration funds invest in debt and money market instruments with a 3 to 4 years maturity period. These funds offer a higher risk profile than short-duration funds but aim to provide higher returns in the medium term.
   
6. Long Duration Funds: Long-duration funds invest in debt and money market instruments with a maturity period of over 7 years. These funds offer a higher risk profile than medium-duration funds but aim to provide higher returns in the long term.
   
7. Gilt Funds: Gilt funds invest primarily in government securities issued by the central and state governments. These funds are relatively low-risk investments and are ideal for investors looking to earn a steady income while preserving their capital.
   
8. Credit Risk Funds: Credit risk funds invest in lower-rated corporate bonds and debt securities. These funds offer higher returns but come with higher credit risk, making them suitable for investors with a high-risk appetite.
   
9. Corporate Bond Funds: Corporate bond funds invest in debt and money market instruments. These funds offer relatively higher returns than gilt funds and are ideal for investors looking for moderate-risk investments.
   
10. Banking and PSU Funds: Banking and PSU funds invest primarily in debt and money market instruments issued by banks and public sector undertakings. These funds are relatively low-risk investments and are ideal for investors looking for a steady income with relatively low risk.

In conclusion, debt mutual funds allow investors to invest in fixed-income securities with a relatively low-risk profile. However, it is essential to understand the different categories of debt mutual funds and their investment objectives before investing. Investors should also consider their risk profile and investment objectives before selecting a particular type of debt mutual fund.