Let’s accept that in the past debt funds have not been easy to understand.

For a long period of time, most retail investors found it difficult to select one for their needs.

Should you buy a liquid fund, a short-term fund, a dynamic bond or a Government Securities Fund?

What kind of risk you were taking with any of these?

Unless, you were willing to dive deep down into fund literature, the answers were not easy to find.

Not anymore.

With the new recategorization and rationalization of debt funds, you will see them in a different light. The labels are sharp and clear and so is the risk associated with them.

So much so that you can just look and pick the fund that is right for your investment horizon and risk appetite.More on this later.

As we mentioned in the earlier post too, there are now 16 types of debt funds that can be offered by any mutual fund house.

They are further divided in sub categories. Let’s take a close look.

Maturity based funds

Every debt investment has to mature on some day and return the principal investment and the final interest to the lender. Based on the average maturity (for different investments) of the portfolio, we get the maturity based fund types.

1. Overnight fund – literally overnight
2. Liquid Fund – Upto 91 days
3. Money market fund –12 months
4. Gilt Funds with 10 year constant maturity

Duration based funds

Duration is the measure of interest rate risk and is mentioned in no. of years. It is not too difficult to understand.

If for example, a debt fund has a duration of 1, it means that for every 1% change in interest rates, the value of the fund will change by 1% too, though in the other direction. If the interest rate rises, the value will fall and vice versa.

The new SEBI norms have defined 7 types of funds based on Macaulay Duration:

1. Ultra Short Duration Fund – Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3-6months
2. Low Duration Fund – Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6-12 months
3. Short Term Fund – Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1-3 year
4. Medium Term Fund – Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3-4 years*
5. Medium to Long Term Fund – Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4-7 years#
6. Long Term Fund – Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is 7 years plus
7. Dynamic Bond – Investment in Debt & Money Market instruments across durations

*SEBI allows the fund to run 1 to 4 years under adverse condition
#SEBI allows the fund to run 1 to 7 years under adverse condition

There is one more type based on interest rates but not exactly duration driven.


8. Floating Rate Fund - It holds investments that are frequently reset to the current market interest rates i.e. it invests 65% or more in floating rate instruments



Credit Quality



Another risk that debt funds may carry is the credit quality or the likelihood of repayment by the issuer.

Based on credit quality here is how the new debt fund types look.


9. Banking & PSU Fund – 80% or more in Banking & PSU bonds only, typically high rated
10. Corporate Bond Fund – 80% or more in high credit rating investments (AA+ or higher).
11. Government Securities Fund or GILTs – holds only Government securities (Sovereign rating / highest rating)
12. Credit Risk Fund – has most holdings (65% or higher) in lower credit rated investments (AA and below).

Higher credit quality is desirable in debt fund investments. However, there are investors who may be comfortable holding some risk with respect to credit quality.

So, these are the new labels for debt funds in line with their risk profile and time horizon.

Now let’s see how Aditya Birla Sun Life Mutual Fund debt fund offerings fit with these labels and how simple it is to pick one now.

As you can see, based on how long you can remain invested in a particular fund, you can use this duration / maturity meter to pick the right Aditya Birla Sun Lifedebt fund for your needs.

The Aditya Birla Sun Life Low duration fund or Aditya Birla Sun Life Money Manager Fund can be your solution for parking short term surplus or for creating a Systematic Transfer Planto an equity fund.

For a 1 - 3 year horizon, you can look at Aditya Birla Sun Life Short Term Opportunities Fund. Do remember that higher duration means higher sensitivity.

Then there are the funds based on credit quality.

Here too, you can use credit quality to choose your fund.

If you are keen on having high credit quality then Aditya Birla Sun LifeCorporate bond fund or Aditya Birla Sun Life Government Securities fund can be your investment of choice.

How easy and efficient, isn’t it? So go ahead and pick your fund.

If you still feel undecided with the debt fund categories, it is best to work with your financial advisor to select the right one for you.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.