The character of debt funds is often undermined by the euphoria over the performance of equities, driven by the news and excitement around the stock markets. However, a well-constructed investment portfolio is based on asset allocation, which involves an appropriate mix of equity and debt instruments. While equities are generally growth oriented, debt instruments focus more towards capital appreciation. Therefore, the role of debt funds in an investment portfolio should not be overlooked.

A debt fund is a type of mutual fund scheme that invests in fixed income instruments, such as corporate bonds, government securities and money market instruments. These instruments are generally less volatile compare to equities, making debt funds suitable for short to medium term goals liquidity needs and for investor who prefer relatively lower volatility in their investments. However, the investor should take into account their risk appetite, goal, investment strategy among others before investing in such instruments.

Why Consider Debt Funds?
Compared to equities, debt investments, tends to be less volatile in terms of day-to-day fluctuations in price. How much you wish to allocate to debt funds in your portfolio is governed by your priority for capital appreciation in your investment portfolio, along with the risk that you can take with your investments.

Understanding Debt Instruments

When you invest in debt instruments, you tend to lend money to an issuer in return for interest income. Bonds, for example, have three key features that determine their cash flows:

1. Coupon – The interest rate paid periodically to investors.
2. Par value – The principal amount repaid at maturity
3. Maturity – The date on which the bond is redeemed, assuming all payments are made as scheduled

These features collectively determine the timing and amount of capital appreciation from debt investments.

Risks Associated with Debt Funds

Although debt funds are generally less volatile than equities, they are not risk-free. Some key risks include:

1. Credit Risk – The risk that the issuer may fail to meet interest or principal repayment obligations. This risk is higher in lower-rated securities.
2. Interest Rate Risk, Bond prices move inversely to interest rates. When interest rates. rise, bond prices may fall, impacting fund returns.

Understanding these risks helps investors choose debt funds that align with their risk appetite.

Types of Debt Funds

As per Securities Exchange Board of India (SEBI) guidelines. there are multiple categories of debt funds, classified based on their investment strategy and indicative maturity. Investors can select a category depending on their time horizon, liquidity needs and risk tolerance.

Different Category of Debt Funds for Different Investment Horizons

Category of Fund	Scheme characteristics of the Fund
Overnight Fund	Overnight securities having maturity of 1 day
Liquid Fund	Debt and money market securities with maturity of up to 91 days only
Ultra Short Duration Fund	Debt & Money Market instruments with Macaulay duration of the portfolio between 3 months – 6 months
Low Duration Fund	Investment in Debt & Money Market instruments with Macaulay duration portfolio between 6 months – 12 months
Money Market Fund	Investment in Money Market instruments having maturity up to 1 Year
Short Duration Fund	Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 1 year – 3 years
Medium Duration Fund	Investment in Debt & Money Market instruments with Macaulay duration of portfolio between 3 years – 4 years
Medium to Long Duration Fund	Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 4 – 7 years
Long Duration Fund	Investment in Debt & Money Market Instruments with Macaulay duration of the portfolio greater than 7 years
Dynamic Bond	Investment across duration
Corporate Bond Fund	Minimum 80% investment in corporate bonds only in AA+ and above rated corporate bonds
Credit Risk Fund	Minimum 65% investment in corporate bonds, only in AA and below rated corporate bonds
Banking and PSU Fund	Minimum 80% in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds
Gilt Fund	Minimum 80% in G-Secs, across maturity
Gilt Fund with 10 year constant Duration	Minimum 80% in G-Secs, such that the Macaulay duration of the portfolio is equal to 10 years
Floater Fund	Minimum 65% in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/derivatives)

Disclaimers:

The information provided in this document is only for reading purpose and does not constitute any guidelines or recommendation on any course of action to be followed by the reader. The information used to represent the views have been obtained from sources published by third parties. While such publications are believed to be reliable, the opinions expressed in this document do not constitute the views of Canara Robeco Asset Management Company Limited. Statements/ opinions/recommendations in this communication which contain words or phrases such as “will”, “expect”, “could”, “believe” and similar expressions or variations of such expressions are “forward – looking statements”. Actual results may differ materially from those suggested by the forward-looking statements due to market risk or uncertainties. Recipients of this communication should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice, verify the contents, and arrive at an informed investment decision before making any investments. None of the Sponsor, the Investment Manager, the Trustees, their respective directors, employees, associates, or representatives shall be liable for any direct, indirect, special, incidental, consequential, punitive, or exemplary damages, including lost profits arising in any way from the information contained in this material.