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What are the different types of debt mutual funds?

Debt funds are mutual funds that invest in debt instruments, such as treasury bills, government securities, certificates of deposits (CDs), commercial paper, corporate bonds, etc. If you want to invest in debt mutual funds, you can either invest your money in a lump sum or choose the SIP (Systematic Investment Plan) mode. In the SIP mode, you invest a specific sum at a pre-agreed frequency.

Debt funds are less risky than equity investments. Hence, a lot of low-risk investors prefer investing in debt mutual funds. However, there are different types of debt funds classified according to the risk-return on investment and investment period.

Here is everything you need to know about the different types of debt mutual funds:

  1. Overnight funds: Overnight debt funds invest in debt securities with a one-day maturity period. Typically, these are money market instruments and are less volatile. Overnight funds are for investors with a short investment horizon who prefer liquidity and convenience over high returns.
  2. Liquid funds: Liquid mutual funds are market securities with a short-term investment period (usually less than 91 days). These mutual funds are suitable for investors who can take some risk for a short duration but want liquidity in investment. Liquid funds offer higher returns than ordinary savings bank account deposits.
  3. Ultra-short duration funds:These debt funds work well for investors with a short investment horizon but not less than three months. These mutual funds carry low risk and offer slightly higher yields (by investing in low-rated debt instruments) than liquid funds.
  4. Low duration funds: Low duration mutual fundscarry moderate risk and generate attractive returns. These mutual funds include low-credit-rated bonds to boost the returns. These funds are feasible for investors who want to invest for six months to one year.
  5. Money market funds: These are debt funds with an investment period of one year. These are slightly longer duration funds, suitable for investors who want capital gains at low risk.
  6. Corporate bond funds: These funds allocate 80% or more of their corpus in high-rated corporate bonds (AA+ or higher) to offer significantly high returns. Corporate debt mutual funds benefit investors that want regular income and the safety of their money.
  7. Credit risk funds: These mutual funds include 65% investments in corporate bonds with an AA or lower rating. Credit risk debt funds usually generate higher returns and carry a higher risk than corporate funds because of the low-rated bond investments.
  8. Fixed maturity plans (FMPs): These close-ended mutual funds include low-risk, high-rated debt securities with maturities aligned with the mutual fund scheme tenure. FMPsare for long-term investors who want to lock in interest rates.
  9. Dynamic bond funds:These mutual funds invest across different debt issuers and have different maturity periods between three and five years. These mutual funds come with moderate risk and returns.
  10. Gilt funds: These are funds that invest in government securities with different maturity periods. These mutual funds can be long or short-duration funds as per your preference. Gilt mutual funds have no risk and offer moderate but assured returns.


First, understand each type of debt fund. Then use verified investment apps, such as Tata Capital Moneyfy App, to research, shortlist and invest in a mutual fund scheme that best aligns with your risk appetite, financial goals, and investment horizon.

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