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How to Invest in debt?

In this article, we will focus on the debt component of asset allocation. We will discuss the various debt products available for investment, their features, and how to invest in debt.
How to invest in debt

Appropriate asset allocations among various asset classes (equity, debt, and gold) help in achieving financial goals in a seamless manner. Equity can provide growth to your portfolio. Debt can provide stability. Gold can act as a hedge against inflation. In this article, we will focus on the debt component of asset allocation. In this article, let’s understand the various debt products available for investment, features of some debt mutual fund schemes, and how to invest in debt.

Debt products available for investment

As an investor, you can invest in various debt products depending on your risk profile, investment time horizon, tax benefits, liquidity, lock-in period, etc. Some of these products include:

  1. Bank fixed deposits
  2. Bank recurring deposits
  3. Small savings products with banks and post offices (fixed deposit, recurring deposit, Public Provident Fund (PPF), National Savings Certificate (NSC), Kisan Vikas Patra (KVP), etc.
  4. Debt mutual funds
  5. Bonds and debentures

In this article, we will discuss the types of debt mutual funds, who should invest in them, how they should invest, and much more.

SEBI categorisation of debt mutual funds

SEBI has categorised debt mutual funds into 17 different sub-categories. Following are some of them:

Debt mutual fund categoryRisk and return expectation
Gilt FundsHighest
Gilt Funds with 10-years constant duration↑↑↑
Dynamic Funds↑↑↑
Long Duration Funds↑↑↑
Medium to Long Duration Funds↑↑↑
Medium Duration Funds↑↑↑
Short Duration Funds↑↑↑
Money Market Funds↑↑↑
Low Duration Funds↑↑↑
Ultra Short Duration Funds↑↑↑
Liquid Funds↑↑↑
Overnight FundsLowest

As we can see from the above table, the overnight funds have the lowest risk and return expectations. On the other hand, the gilt funds carry the highest risk and return expectations. We will discuss some of these debt mutual funds based on the maturity profile of securities, the purpose of investment, investor’s risk profile, etc.

Concept of Macaulay Duration

SEBI has categorised a lot of debt funds based on Macaulay Duration. So, let us first understand what Macaulay Duration is before we understand the types of debt mutual funds. Macaulay duration measures how long it will take for an investor to get back the amount they invested in fixed income security (for example, bond) with the cash flows earned from that security. The cash flows from a bond include the regular interest repayments and the principal repayment on maturity.

1. Maturity profile of securities

Some debt mutual funds invest in various securities based on the remaining maturity of the security. These debt mutual funds include:

  • Overnight Fund

Overnight funds are open-ended debt schemes that invest in overnight securities having a maturity profile of 1 business day. These funds have low volatility, low-interest rate risk, and low default rate. These funds focus on capital conservation, provide high liquidity and reasonable returns. Some of the securities that these funds invest in include overnight reverse repos, Collateralised Borrowing & Lending Obligations (CBLO), and other fixed-income securities with overnight maturity.

Who should invest in overnight funds

Overnight funds are ideal for investors with a conservative risk profile who want to park their surplus funds for a very short duration. These funds have securities maturing every day. They use the maturity proceeds to buy new securities every day. Investors can invest in overnight funds through a lump sum or a systematic investment plan (SIP). 

Following are some examples of overnight funds and the returns given by them.

Scheme name1 month3 months6 months1 year
BOI AXA Overnight Fund0.27%0.82%1.59%3.20%
Mirae Asset Overnight Fund0.27%0.82%1.59%3.18%
HSBC Overnight Fund0.27%0.82%1.59%3.17%

(Source: https://www.moneycontrol.com)

Note: The above returns are as of 02 August 2021. The returns are for direct plans with growth option. The returns are annualised. The funds have been ranked based on 1-year returns.

How to invest in an overnight fund?

You can invest in an overnight fund through the Glide Invest App. You can do your risk profiling, and the platform will recommend the appropriate asset allocation. You can select your financial goals, and accordingly, the platform will recommend the debt funds (including overnight funds) for investment as part of the debt component of your overall investment portfolio.

If you have already decided to invest in a specific overnight fund for a short-term financial goal, you can open the Glide Invest App, select the overnight fund and go ahead with the investment.

  • Short-term debt funds

These are open-ended debt mutual funds that invest in debt securities such that the Macaulay duration of the portfolio is between 3 months to 3 years. 

Based on Macaulay duration, short-term debt funds are further sub-categorised as follows:

Ultra Short Duration FundAn open-ended debt scheme that invests in debt and money market instruments such that the Macaulay duration of the portfolio is between 3 – 6 months.
Low Duration FundAn open-ended debt scheme that invests in debt and money market instruments such that the Macaulay duration of the portfolio is between 6 – 12 months.
Money Market FundAn open-ended debt scheme that invests in money market instruments having maturity up to 1 year.
Short Duration FundAn open-ended debt scheme that invests in debt and money market instruments such that the Macaulay duration of the portfolio is between 1 – 3 years.

Who should invest in short-term debt funds?

Investors with a conservative to moderate risk profile and an investment time horizon of up to 3 years may consider investing in these funds. These funds have a low to moderate risk profile and are expected to give low to moderate returns. 

Goal planning with short-term debt funds

These funds are ideal for planning for short-term financial goals like building an emergency fund, buying a vehicle, planning a vacation, accumulating down payment for buying a house, etc.

Following are some examples of short-term debt funds.

Scheme name1 year3 years5 years
Ultra short duration funds
PGIM India Ultra Short Term Fund4.08%8.55%8.09%
ICICI Prudential Ultra Short Term Fund5.34%7.52%7.85%
Aditya Birla Sun Life Savings Fund4.76%7.24%7.36%
Low duration funds
Kotak Low Duration Fund5.32%7.94%8.07%
Aditya Birla Sun Life Low Duration Fund5.39%7.98%7.85%
ICICI Prudential Savings Fund5.37%7.73%7.63%
Money market funds
Edelweiss Money Market Fund3.77%9.09%7.36%
L&T Money Market Fund3.46%6.60%7.25%
Franklin India Savings Fund3.83%6.79%7.04%
Short duration funds
ICICI Prudential Short Term Fund5.96%9.26%8.54%
Aditya Birla Sun Life Short Term Fund6.87%9.20%8.35%
Axis Short Term Fund5.38%9.04%8.30%

(Source: https://www.moneycontrol.com)

Note: The above returns are as of 02 August 2021. The returns are for direct plans with growth option. One-year returns are annualised, and three and 5-year returns are CAGR. The funds have been ranked based on 5-year returns.

  • Medium to long term funds

These are open-ended debt mutual funds that invest in debt securities such that the Macaulay duration of the portfolio ranges from 3 to 7 years or higher.

Based on Macaulay duration, these funds are further sub-categorised as follows:

Medium Duration FundAn open-ended debt scheme that invests in debt and money market instruments such that the Macaulay duration of the portfolio is between 3 – 4 years.
Medium to Long Duration FundAn open-ended debt scheme that invests in debt and money market instruments such that the Macaulay duration of the portfolio is between 4 – 7 years.
Long Duration FundAn open-ended debt scheme that invests in debt and money market instruments such that the Macaulay duration of the portfolio is greater than 7 years.
Dynamic Bond FundAn open-ended debt scheme that invests in debt and money market instruments with various maturities.

Who should invest in medium to long-term debt funds?

Investors with a conservative to moderate risk profile and an investment time horizon of 3 to 7 years may consider investing in medium duration or medium to long-duration funds. Investors with an investment time horizon of more than 7 years may consider investing in long-duration funds. These funds have a low to moderate risk profile and are expected to give low to moderate returns.

Goal planning with medium to long-term debt funds

These funds are ideal for planning for medium to long-term financial goals like accumulating money for home loan repayment, building a fund for a child’s higher education and marriage, building a fund for retirement, etc.

Following are some examples of medium to long-term debt funds.

Scheme name1 year3 years5 years
Medium duration funds
SBI Magnum Medium Duration Fund6.81%9.92%9.69%
Axis Strategic Bond Fund7.59%8.68%8.54%
ICICI Prudential Medium Term Bond Fund8.26%9.10%8.53%
Medium to long duration funds
SBI Magnum Income Fund6.02%10.06%9.09%
IDFC Bond Fund – Income Plan2.74%9.64%8.23%
ICICI Prudential Bond Fund4.33%9.41%8.09%
Long duration funds
ICICI Prudential Long Term Bond Fund1.27%9.53%8.33%
Nippon India Nivesh Lakshya Fund-0.72%10.97%NA
Dynamic bond funds
ICICI Prudential All Seasons Bond Fund6.14%9.92%9.12%
Kotak Dynamic Bond Fund4.89%10.06%9.00%
IDFC Dynamic Bond Fund3.34%10.50%8.83%

(Source: https://www.moneycontrol.com)
Note: The above returns are as of 02 August 2021. The returns are for direct plans with growth options. One-year returns are annualised, and three and 5-year returns are CAGR. The funds have been ranked based on 5-year returns.

Note: The above returns are as of 02 August 2021. The returns are for direct plans with growth options. One-year returns are annualised, and three and 5-year returns are CAGR. The funds have been ranked based on 5-year returns

2. Purpose of investment

Some investors invest in specific debt funds with a specific purpose. For example, many investors invest in liquid funds to create and maintain an emergency fund. Let us understand liquid funds.

  • Liquid Fund

Liquid funds are open-ended schemes that invest in debt and money market securities with a residual maturity of up to 91 days. Some of the financial products that liquid funds invest in include Treasury Bills (T-Bills), Commercial Paper (CP), Certificate of Deposit (CD), etc. 
The objective of liquid funds is to provide steady returns along with safety and liquidity to investors. Liquid funds are ideal for building and maintaining an emergency fund.

Following are some examples of liquid funds and the returns given by them.

Scheme name1 year3 years5 years
Quant Liquid Plan4.65%6.18%6.49%
Mahindra Manulife Liquid Fund3.40%5.46%6.10%
IDBI Liquid Fund3.44%5.50%6.09%

(Source: https://www.moneycontrol.com)

Note: The above returns are as of 02 August 2021. The returns are for direct plans with growth option. One-year returns are annualised, and three and 5-year returns are CAGR. The funds have been ranked based on 5-year returns.

Instant redemption: Some AMCs provide the instant redemption option to investors of liquid funds. The amount is transferred to the investor’s bank account in a few minutes through IMPS. The redemption is allowed for a specified amount (for example, 90% of the balance available or Rs. 50,000, whichever is lower).

3. Investor’s risk profile

Some investors invest in specific debt funds based on the risk they are willing to take and get appropriate returns accordingly. If you are a conseravtive investor, you can choose from gilt funds, banking and PSU funds, or corporate bond funds. If you are an aggressive investor, you can choose to invest in a credit risk fund. Let us discuss each of these debt mutual funds in detail.

  • Gilt Fund

A gilt fund is an open-ended debt scheme that invests a minimum of 80% of its total assets in Government securities (G-secs) across various maturities. These funds are suitable for conservative investors who don’t wish to take credit risks. These funds are expected to give low to moderate investment returns along with capital protection. 

Following are some examples of gilt funds and the returns given by them.

Scheme name1 year3 years5 years
Nippon India Gilt Securities Fund3.00%10.73%9.40%
IDFC Government Securities Fund3.31%11.63%9.39%
SBI Magnum Gilt Fund3.83%10.48%8.99%

(Source: https://www.moneycontrol.com)

Note: The above returns are as of 02 August 2021. The returns are for direct plans with growth option. One-year returns are annualised, and three and 5-year returns are CAGR. The funds have been ranked based on 5-year returns.

  • Banking and PSU Fund

A banking and PSU fund is an open-ended debt scheme that invests a minimum of 80% of its total assets in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions. These funds are suitable for conservative investors. The risk profile of these funds is relatively higher than that of gilt funds but lower than that of corporate bond funds and credit risk funds. These funds are expected to give low to moderate investment returns.

Following are some examples of banking and PSU funds and the returns given by them.

Scheme name1 year3 years5 years
Edelweiss Banking and PSU Debt Fund4.26%10.38%8.73%
Kotak Banking and PSU Debt Fund5.03%9.27%8.42%
Nippon India Banking and PSU Debt Fund5.38%9.50%8.37%

(Source: https://www.moneycontrol.com)

Note: The above returns are as of 02 August 2021. The returns are for direct plans with growth option. One-year returns are annualised, and three and 5-year returns are CAGR. The funds have been ranked based on 5-year returns.

  • Corporate Bond Fund

A corporate bond fund is an open-ended debt scheme that invests a minimum of 80% of its total assets in corporate bonds (only in the highest rated instruments). These funds are suitable for conservative investors. The risk profile of these funds is relatively higher than that of gilt funds and banking and PSU funds but lower than that of credit risk funds. These funds are expected to give low to moderate investment returns.

Following are some examples of corporate bond funds and the returns given by them.

Scheme name1 year3 years5 years
Franklin India Corporate Debt Fund – Plan A6.61%8.72%8.63%
Aditya Birla Sun Life Corporate Bond Fund5.76%9.33%8.42%
HDFC Corporate Bond Fund5.40%9.38%8.37%

(Source: https://www.moneycontrol.com)

Note: The above returns are as of 02 August 2021. The returns are for direct plans with growth option. One-year returns are annualised, and three and 5-year returns are CAGR. The funds have been ranked based on 5-year returns.

  • Credit Risk Fund

A credit fund is an open-ended debt scheme that invests a minimum of 65% of its total assets in corporate bonds (investment in below highest rated instruments). These funds are suitable for aggressive investors who are willing to take higher credit risk with an expectation to earn higher returns. The risk profile of these funds is relatively higher than that of gilt funds, banking and PSU funds, and corporate bond funds. These funds are expected to give moderate investment returns.

Following are some examples of credit risk funds and the returns given by them.

Scheme name1 year3 years5 years
ICICI Prudential Credit Risk Fund8.57%9.41%9.01%
HDFC Credit Risk Debt Fund10.16%9.53%8.79%
Kotak Credit Risk Fund7.72%8.20%8.18%

(Source: https://www.moneycontrol.com)
Note: The above returns are as of 02 August 2021. The returns are for direct plans with growth option. One-year returns are annualised, and three and 5-year returns are CAGR. The funds have been ranked based on 5-year returns.

How to invest in debt funds

The Glide Invest platform can help you achieve your financial goals. Based on your risk assessment, the platform will recommend an appropriate asset allocation. As part of the debt portion of your asset allocation, the platform will recommend the appropriate debt mutual funds to invest in. The Glide Invest platform can help you plan and systematically invest towards your financial goals. You will get guidance for:

  1. A personalised risk profile assessment
  2. Identifying your financial goals
  3. Appropriate asset allocation
  4. Making a financial plan for each goal
  5. Automating the financial plan
  6. Review and analysis of your financial plan 
  7. Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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