In the earlier times, and even in some rural areas today, the wealthy people used to offer their money to those who were less fortunate in the exchange of interest rate, as a means of investment. This was a good source of investment for the wealthy. In this era, mutual funds offer higher returns and interest rates to their investors, but investors are often afraid while investing in mutual funds as they do not have any prior knowledge of the industry. 

Types of Debt Mutual Fund 

Debt funds are an investment pool that invests money in securities that offer fixed income, which includes treasury bills, corporate funds, commercial papers, government securities, and also buying and selling of loans in exchange for interest, and other money market instruments, to generate higher returns. 

Subcategories of Debt funds 

• Overnight Fund 

The fund manager invests money in debt securities which make this fund scheme safer (as it invests in government securities which are meant to be safer investment options). It offers a higher interest rate with minimal risks as compared to other fund schemes. The maturity period is one day. 

• Liquidity Fund 

Liquid funds invest in debt instruments with a maturity of not more than 91 days. This makes them almost risk-free. Liquid funds have rarely seen negative returns. These funds are better alternatives to savings bank accounts as they provide similar liquidity with higher yields. Many mutual fund companies offer instant redemption on liquid fund investments through unique debit cards. 

• Ultra-Short Duration Fund 

The fund manager invests in debt securities and money market instruments according to the financial goals of the investors. The duration period of this fund is between 3 -6 months, with good returns of 7-9% approximately. 

• Low-Duration Fund 

A Low-Duration fund invests in securities and money market instruments like other schemes of debt funds. The duration of this fund scheme is between 6-12 months. This scheme might be ideal for those investors who wish to get higher returns within a year instead of saving their money in the bank.  

• Money Market Fund 

The fund manager invests in various money market instruments like treasury bills, repurchase agreements, commercial papers, etc. This fund scheme offers good returns within a year and maintains high levels of liquidity. 

• Short-Duration Fund 

For a short-term investor, debt funds like liquid funds may be an ideal investment, compared to keeping your money in a saving bank account. Liquid funds offer higher returns in the range of 7%-9% along with similar kinds of liquidity to meet emergency requirements. 

• Medium Duration Fund 

Like any other debt fund scheme, this fund scheme also invests in debt securities and money market instruments to offer higher returns. The maturity period of this fund scheme is between 3-4 years. If an investor wishes to invest in mutual funds for 3-4 years to get higher returns, this fund scheme might be ideal for him, as it offers 7-9% of returns on the investments. 

• Long-Duration Fund 

This fund scheme invests in debt securities with the objective to offer higher returns to its investors. The maturity period of this fund is more than 7years. This fund offers higher returns but is more sensitive because of the interest rate fluctuations in the market. 

• Dynamic Bond Fund 

This fund invests in various debt securities based on the interest rate. It offers optimal returns to its investors within the maturity period of 3-5 years with moderate risks. The fund manager analyses the market cycle and according to this analysis, makes decisions to gain optimal returns. 

• Gilt Fund 

Gilt Funds invest in only government securities – high-rated securities with very low credit risk. Since the government seldom defaults on the loan it takes in the form of debt instruments; gilt funds are an ideal choice for risk-averse fixed-income investors. 

• Floater Fund 

This fund majorly invests in various debt securities offering various interest rates that depend on market fluctuations. This fund still manages to take advantage of the market cycle to attain the optimal returns for its investors. It offers a higher return with minimal risk to its investors. 

• Fixed Maturity Plans (FMP) 

As the name suggests, ‘Fixed’ Maturity Plans is a closed-ended mutual fund, which comes up with a fixed maturity period and with a limited period of investments. 

Debt funds aim to generate returns for investors by investing their money in avenues like bonds and other fixed-income securities. This means that these funds buy the bonds and earn interest income on the money. The yields that mutual fund investors receive is based on this.