Debt funds invest in fixed income securities issued by the Government and Companies. These fixed income securities include corporate bonds, government securities, treasury bills, money market instruments etc. Debt funds are preferred by individuals who are not willing to invest in a highly volatile equity market. A debt fund provides a steady but lower income compared to equity. It is also comparatively less volatile.

This does not mean that Debt Funds don’t carry risk. There are debt funds with different risk profiles for different requirements.

Debt Funds classification by duration:

As per the Macaulay duration of the securities they hold, debt funds can be classified into Overnight Funds, Liquid Funds, Ultra Short Term Funds, Low Duration Funds, Short Term Funds, Medium Term Funds, Long Term Funds & Dynamic Bond Funds. Do note that this list is not exhaustive.

Debt Fund classification by quality of securities:

As per regulations, debt funds are also classified according to the credit quality of the securities they hold. This classification is very useful for the investors to identify a suitable debt fund as per their risk appetite. Prominent categories as per this classifications are Credit Risk Funds, Corporate Bond Fund, Banking & PSU Debt Funds, Govt Securities Funds. Again this should not be considered exhaustive.