Types of Debt Funds

Gilt funds invest in only treasury bills and government securities,which do not have a credit risk (i.e. the risk that the issuer of the security defaults).

Diversified debt funds on the other hand, invest in a mix of government and non-government debt securities.

Junk bond schemes or high yield bond schemes invest in companies that are of poor credit quality. Such schemes operate on the premise that the attractive returns offered by the investee companies makes up for the losses arising out of a few companies defaulting.

Fixed maturity plans are a kind of debt fund where the investment portfolio is closely aligned to the maturity of the scheme. AMCs tend to structure the scheme around pre-identified investments. Further, like close-ended schemes, they do not accept moneys post-NFO. Thanks to these characteristics, the fund manager has little ongoing role in deciding on the investment options. As will be seen in Unit 8, such a portfolio construction gives more clarity to investors on the likely returns if they stay invested in the scheme until its maturity. This helps them compare the returns with alternative investments like bank deposits.

Floating rate funds invest largely in floating rate debt securities i.e. debt securities where the interest rate payable by the issuer changes in line with the market. For example, a debt security where interest payable is described as ‘5-year Government Security yield plus 1%’, will pay interest rate of 7%, when the 5- year Government Security yield is 6%; if 5-year Government Security yield goes down to 3%, then only 4% interest will be payable on that debt security. The NAVs of such schemes fluctuate lesser than debt funds that invest more in debt securities

offering a fixed rate of interest.

Liquid schemes or money market schemes are a variant of debt schemes that invest only in debt securities where the moneys will be repaid within 91-days. As will be seen later in this Work Book, these are widely recognized to be the lowest in risk among all kinds of mutual fund schemes.