Understanding classification of debt funds

Having known what a debt fund is let us know its classification. Market regulator Sebi has directed mutual fund houses to recategorize all their schemes in the new and distinct categories specified by the board.

This is aimed at bringing uniformity in the categorisation of schemes in mutual funds. This is also supposed to ease the job of choosing the right investment debt fund. But still there would be 16 debt fund categories. The following is the classification.

Funds classified on the basis of duration

Ultra-short duration funds: These open-ended ultra short-term debt schemes will invest in instruments with the maturity between three months and six months

Low duration funds: These open-ended debt schemes will invest in instruments with a duration between six months and twelve months.

Short duration funds: These open-ended debt schemes will invest in instruments with a duration between one year and three years

Medium duration funds: These open-ended debt schemes will invest in instruments with a duration between three years and four years

Medium to long duration funds: These open-ended debt schemes will invest in instruments with a duration between four and seven years

Long duration funds: These open-ended debt schemes will invest in instruments with the duration of greater than seven years
Dynamic bonds: These open-ended schemes will invest across durations

Gilt Fund with the tenure constant duration: These open-ended debt schemes will invest in government securities with a constant maturity of 10 years. This scheme should invest at least 80 per cent of the total assets in government securities
Maturity-based fund categories

Overnight funds: These open-ended debt schemes will invest in overnight securities with a maturity of one day

Liquid funds: These schemes will invest in debt and money market securities with a maturity of up to 91 days

Money market funds: This open-ended debt schemes will invest in money market instruments with the maturity of up to one year.
Gilt funds: These are open ended debt schemes will invest in government securities across maturity. These schemes should invest a minimum of 80 per cent of its total assets in government securities

Ratings-based fund categories

Credit rating companies like CRISIL, ICRA, etc. assign ratings to the financial instruments used by various organizations based on their financial health, ability to repay etc. Based on the ratings parameter, there will be two types of funds.

Corporate Bond funds: These open-ended debt scheme will predominantly invest in highest rated corporate bonds. These schemes should invest at least 80 per cent of total assets in corporate bonds only in highest rated instruments

Credit risk funds: These open ended up schemes will invest in below highest rated corporate bonds. They should invest at least 65 per cent of the total assets in corporate bonds
Other categories

Banking and PSU funds: These open-ended debt schemes will predominantly invest in debt instruments of banks, public sector undertaking and public Financial Institutions.

Floater funds: These open-ended debt schemes will invest mostly in floating rate instruments. These schemes will invest at least 65 per cent of the total assets in floating rate instruments.

The criteria for selecting a fund for an investor is always the past performance of the fund. The investor overlooks the risk involved. The new categorisation helps understand the risk aspects of a debt fund. (The author is a homemaker who dabbles in stock market investments in free time)

By Sneha Latha