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:
- Bank fixed deposits
- Bank recurring deposits
- 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.
- Debt mutual funds
- 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 category | Risk and return expectation |
| Gilt Funds | Highest |
| 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 Funds | Lowest |
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 name | 1 month | 3 months | 6 months | 1 year |
| BOI AXA Overnight Fund | 0.27% | 0.82% | 1.59% | 3.20% |
| Mirae Asset Overnight Fund | 0.27% | 0.82% | 1.59% | 3.18% |
| HSBC Overnight Fund | 0.27% | 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 Fund | An 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 Fund | An 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 Fund | An open-ended debt scheme that invests in money market instruments having maturity up to 1 year. |
| Short Duration Fund | An 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 name | 1 year | 3 years | 5 years |
| Ultra short duration funds | |||
| PGIM India Ultra Short Term Fund | 4.08% | 8.55% | 8.09% |
| ICICI Prudential Ultra Short Term Fund | 5.34% | 7.52% | 7.85% |
| Aditya Birla Sun Life Savings Fund | 4.76% | 7.24% | 7.36% |
| Low duration funds | |||
| Kotak Low Duration Fund | 5.32% | 7.94% | 8.07% |
| Aditya Birla Sun Life Low Duration Fund | 5.39% | 7.98% | 7.85% |
| ICICI Prudential Savings Fund | 5.37% | 7.73% | 7.63% |
| Money market funds | |||
| Edelweiss Money Market Fund | 3.77% | 9.09% | 7.36% |
| L&T Money Market Fund | 3.46% | 6.60% | 7.25% |
| Franklin India Savings Fund | 3.83% | 6.79% | 7.04% |
| Short duration funds | |||
| ICICI Prudential Short Term Fund | 5.96% | 9.26% | 8.54% |
| Aditya Birla Sun Life Short Term Fund | 6.87% | 9.20% | 8.35% |
| Axis Short Term Fund | 5.38% | 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 Fund | An 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 Fund | An 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 Fund | An 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 Fund | An 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 name | 1 year | 3 years | 5 years |
| Medium duration funds | |||
| SBI Magnum Medium Duration Fund | 6.81% | 9.92% | 9.69% |
| Axis Strategic Bond Fund | 7.59% | 8.68% | 8.54% |
| ICICI Prudential Medium Term Bond Fund | 8.26% | 9.10% | 8.53% |
| Medium to long duration funds | |||
| SBI Magnum Income Fund | 6.02% | 10.06% | 9.09% |
| IDFC Bond Fund – Income Plan | 2.74% | 9.64% | 8.23% |
| ICICI Prudential Bond Fund | 4.33% | 9.41% | 8.09% |
| Long duration funds | |||
| ICICI Prudential Long Term Bond Fund | 1.27% | 9.53% | 8.33% |
| Nippon India Nivesh Lakshya Fund | -0.72% | 10.97% | NA |
| Dynamic bond funds | |||
| ICICI Prudential All Seasons Bond Fund | 6.14% | 9.92% | 9.12% |
| Kotak Dynamic Bond Fund | 4.89% | 10.06% | 9.00% |
| IDFC Dynamic Bond Fund | 3.34% | 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 name | 1 year | 3 years | 5 years |
| Quant Liquid Plan | 4.65% | 6.18% | 6.49% |
| Mahindra Manulife Liquid Fund | 3.40% | 5.46% | 6.10% |
| IDBI Liquid Fund | 3.44% | 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 name | 1 year | 3 years | 5 years |
| Nippon India Gilt Securities Fund | 3.00% | 10.73% | 9.40% |
| IDFC Government Securities Fund | 3.31% | 11.63% | 9.39% |
| SBI Magnum Gilt Fund | 3.83% | 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 name | 1 year | 3 years | 5 years |
| Edelweiss Banking and PSU Debt Fund | 4.26% | 10.38% | 8.73% |
| Kotak Banking and PSU Debt Fund | 5.03% | 9.27% | 8.42% |
| Nippon India Banking and PSU Debt Fund | 5.38% | 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 name | 1 year | 3 years | 5 years |
| Franklin India Corporate Debt Fund – Plan A | 6.61% | 8.72% | 8.63% |
| Aditya Birla Sun Life Corporate Bond Fund | 5.76% | 9.33% | 8.42% |
| HDFC Corporate Bond Fund | 5.40% | 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 name | 1 year | 3 years | 5 years |
| ICICI Prudential Credit Risk Fund | 8.57% | 9.41% | 9.01% |
| HDFC Credit Risk Debt Fund | 10.16% | 9.53% | 8.79% |
| Kotak Credit Risk Fund | 7.72% | 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:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- 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.