Understanding Debt Funds: It’s Simpler Than You Think

You might look at the dozens of debt fund names out there and feel a bit lost. It can seem like a long menu at a restaurant you've never been to.

But what if I told you that picking the right type of fund comes down to answering just two simple questions?

1. How long do I want to invest and lend my money for? (The TIME question)
2. How comfortable do I feel with who the fund lends my money to? (The TRUST question)

That’s it. Almost every debt fund category is just a different combination of answers to these two questions. Let’s walk through this together.

The most common way to separate debt funds is by the time the fund lends your money for. Let's walk along a timeline, from needing your money tomorrow to needing it many years from now.

• For Money Needed Immediately (Days to Weeks)
  Your goal here is to save money for your immediate needs.
  • Overnight Fund: The name says it all. It lends for just one day at a time. This is the most conservative parking spot for your money.
  • Liquid Fund: It is used as an emergency fund or to hold money for next month's expenses. It invests for up to 91 days.
• For Short-Term Goals (A Few Months to a Year)
  You're saving for something on the near horizon, like a new phone or a festival celebration.
  • Ultra Short Duration Fund: It invests in securities that mature in 3 to 6 months.
  • Low Duration Fund: It invests in securities that mature in 6 to 12 months.
  • Money Market Fund: A specialist in this time frame. It invests in debt instruments that mature within one year.
• For Medium-Term Goals (1 to 7 Years)
  Now we're talking about bigger goals, like a down payment for a car in a few years.
  • Short Duration Fund: A potential choice for goals that are 1 to 3 years away.
  • Medium Duration Fund: when your goals are a bit further out, in the 3 to 4 year range.
  • Medium to Long Duration Fund: This bridges the gap to long-term investing, for goals about 4 to 7 years away.
• For Long-Term Goals (7+ Years)
  This is for the patient investor saving for big life goals, like retirement or a house down payment a decade from now.
  • Long Duration Fund: This fund invests for 7 years or more. It requires patience and can be more sensitive to interest rate changes.

Part 2: The TRUST Question & Funds with Special Jobs

Beyond time, funds are also defined by who they lend to and the strategy they follow.

First, "Who are you comfortable lending to?"

• Lending to the Government:
  • Gilt Fund: These funds invest about 80% in government securities.
  • Gilt Fund with 10-year constant duration: A specific type of Gilt Fund that commits to a fixed 10-year lending duration.
• Lending to Top Companies:
  • Corporate Bond Fund: This fund focuses on lending to companies with high credit ratings (AA+ and above) — think of them as the "A+ employees" of the corporate world.
  • Banking and PSU Fund: This fund lends specifically to Banks and reliable Public Sector Undertakings (PSUs).
• Lending to Riskier Companies:
  • Credit Risk Fund: This fund takes a calculated risk by lending to companies that predominantly have a credit rating of AA or below, in the hopes of earning a higher rate of interest.

Next, "Funds with a Smart Strategy"

• The "Adapts-on-its-Own" Fund:
  • Floater Fund: This fund invests in special bonds where the interest rate payout automatically adjusts to the rates in the market. 
• The "Manager-is-in-Charge" Fund:
  • Dynamic Bond Fund: With this fund, you give the fund manager total freedom to change the lending duration based on their view of the market. 

Now that you have a mental map of the different fund types, our next conversation will be about the PRC Matrix—a simple "risk report card" that makes understanding a fund's risk level incredibly easy.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Published on Sept 9th, 2025