Debt represents the borrowings of the issuer
Investment in debt is investment in an income-oriented asset.
The primary source of return to the investor is regular income in the form of interest.
Gilt Funds invest in only treasury bills and government securities, which do not have a credit risk.
Diversified Debt Funds on the other hand, invest in a mix of government and non-government debt securities. They are also known as Income Funds.
Junk Bond schemes or high yield bond schemes invest in companies that are of poor credit quality (Credit Rating lower than Investment Grade).
Fixed Maturity plans are a kind of debt fund where the investment portfolio is closely aligned to the maturity of the scheme. Being close-ended schemes, they do not accept money post-NFO. Returns can be reasonably predicted at the time of investment only. Good alternative to Fixed Deposits with compromise in liquidity.
Floating Rate Funds invest largely in floating rate debt securities i.e. debt securities where the interest rate payable by the issuer changes in line with the market. The NAVs of such schemes fluctuate lesser than debt funds that invest more in debt securities offering a fixed rate of interest.
Liquid Schemes or Money Market Schemes are a variant of debt schemes that invest only in short term debt securities. They can invest in debt securities of upto 91 days maturity. However, these funds generally keep 60 day maturity to avoid volatility of NAV caused by MTM valuation after 60 days.
SEBI CATEGORIZATION OF OPEN ENDED DEBT SCHEMES
Short Duration Fund: Invests in debt and money market instruments with Macaulay duration between 1 year and 3 years.
Medium Duration Fund: Invests in debt and money market instruments with Macaulay duration of the portfolio being between 3 years and 4 years.
Medium to Long Duration Fund: Invests in debt and money market instruments with Macaulay duration between 4 years and 7 years.
Long Duration Fund: Invests in debt and money market instruments with Macaulay duration greater than 7 years.
Banking and PSU Fund: Predominantly invests in debt instruments of banks, PSUs, Public Financial Institutions and Municipal Bonds. The minimum investment in such instruments should be 80% of total assets.
Overnight Fund: The investment is in overnight securities having the maturity of 1 day
Liquid Fund: Liquid scheme whose investment is into debt and money market securities with maturity of upto 91 days only.
Ultra Short Duration Fund: An ultra-short term debt scheme investing in debt and money market instruments with Macaulay duration between 3 months and 6 months.
Low Duration Fund: A low duration debt scheme investing in debt and money market instruments with Macaulay duration between 6 months and 12 months.
Money Market Fund: Invests in money market instruments having maturity upto 1 year.
Corporate Bond Fund: Predominantly invests in AA+ and above rated corporate bonds. The minimum investment in corporate bonds shall be 80 percent of total assets (only in AA+ and above rated corporate bonds)
Credit Risk Fund: Invests in below highest-rated corporate bonds. The minimum investment in corporate bonds shall be 65% of total assets (only in AA (excludes AA+ rated corporate bonds) and below rated corporate bonds)
Banking and PSU Fund: Predominantly investing in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds. The minimum investment in such instruments should be 80 percent of total assets.
Gilt Fund: Invests in government securities across maturity. The minimum investment in G-secs is defined to be 80 percent of total assets (across maturity).
Floater Fund: Predominantly invests in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/derivatives). Minimum investment in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/derivatives) shall be 65 percent of total assets.
Dynamic Bond: An open-ended dynamic debt scheme investing across duration.
Gold Exchange Traded Fund (Gold ETF) is a fund that invests in gold, gold-related securities or gold deposit schemes of banks. The NAV of such funds moves in line with gold prices in the market.
Gold Fund invest in the units of Gold Exchange Traded Funds. They operate like any other mutual fund.
Gold Sector Fund will invest in shares of companies engaged in gold mining and processing. Therefore, NAV of these funds do not closely mirror gold prices.
It is important to understand that unlike Gold sector fund, Gold ETF does not invest in equity shares of companies involved in Gold related businesses including gold mining.
It entails a return in the form of interest (at a pre-specified frequency for a pre-specified period), and refund of a pre-specified amount at the end of the pre-specified period.
The pre-specified period is also called Tenor.
At the end of the tenor, the securities are said to Mature. The process of repaying the amounts due on maturity is called Redemption.
The return that an investor earns or is likely to earn on a debt security is called its Yield. Yield = Interest Income + Capital Gain /Capital Loss
Debt securities that are to mature within a year are called money market securities.
Debt securities may be issued by Central Government, State Governments, Banks, Financial Institutions, Public Sector Undertakings (PSU), Private Companies, Municipalities etc.
Securities issued by the Government are called Government Securities or G-Sec or Gilt.
Treasury Bills are short term debt instruments issued by the Reserve Bank of India on behalf of the Government of India.
Certificates of Deposit are issued by Banks (for 91 days to 1 year) or Financial Institutions (for 1 to 3 years)
Commercial Papers are short term securities (up to 1 year) issued by Companies.
Bonds / Debentures are generally issued for tenors beyond a year. Governments and public sector companies tend to issue bonds, while private sector companies issue debentures.
he possibility of a non-government issuer defaulting on a debt security i.e. its Credit Risk.
It is measured by Credit Rating companies like
CRISIL, ICRA, CARE and Fitch.
They assign different symbols to indicate the credit risk in a debt security. For instance ‘AAA’ is CRISIL’s indicator of highest safety in a debenture.
Higher the credit risk, higher is likely to be the yield on the debt security.
The interest rate offered by company fixed deposits depends on the credit rating assigned.
The difference between the yield on Gilt and the yield on a Non-Government Debt security (with highest safety, i.e. AAA or equivalent) is called its Yield Spread or Credit Spread.
Debt securities can be of three types
Zero Coupon – T-bills
As discussed earlier, NAVs of Floating Rate Schemes fluctuate lesser than debt funds that invest more in debt securities offering a fixed rate of interest.
Interest rates and Market price of debt security are inversely related to each other.
A security of longer maturity would fluctuate a lot more, as compared to short tenor securities. This can be measured by modified duration.
also see hybrid funds and equity funds.