Where Your Money Is Invested: A Look Inside a Debt Fund

So far, we have covered a lot of ground together. We learned that debt funds are about lending. We learned how to choose a fund based on your TIME and TRUST questions. And we learned how to read the simple PRC Matrix, which is like a risk report card for your fund.

This brings us to our last, very logical question:
"What do these funds actually buy with my money?"

When you invest in a "Corporate Bond Fund" or a "Liquid Fund," what is the fund manager purchasing on your behalf? Let's open the hood and look at the actual parts that make these funds work.

The Building Blocks of a Debt Fund
Think of a debt fund manager as a chef. They use a few core ingredients to create different dishes (the funds). Here are the three main ingredients they use:

1. Government Securities (G-Secs):
   • What they are: These are simply bonds (IOUs - as referred to in the blog series earlier) issued by the Government of India. When the government needs to borrow money for projects like building new highways or railways, it issues these securities.
   • Key Feature: They are considered to have the lowest credit risk (risk of default) because they are backed by the sovereign guarantee of the government. They can be very short-term (called Treasury Bills or T-Bills) or long-term (called Government Bonds).
2. Corporate Bonds:
   • What they are: These are bonds issued by public and private companies. For example, when a company needs money to build a new factory or launch a new product, it can borrow from investors by issuing bonds.
   • Key Feature: The safety of these bonds depends on various factors such as the financial health of the company, changes of interest rates etc. Hence, we have credit ratings (AAA, AA, etc.) to tell us how safe a company's bond is.
3. Money Market Instruments:
   • What they are: This is a fancy term for securities that are used for very short-term borrowing and lending, typically for less than a year. The two most common are:
     • Commercial Paper (CP): A debt instrument issued by a large corporation to meet its immediate cash flow needs.
     • Certificate of Deposit (CD): Think of this like a large Fixed Deposit that a bank issues, which can then be traded in the market.

Now, let's see how the funds we've discussed use these ingredients. Looking Inside the Different Funds

• Inside a Liquid Fund: A Liquid Fund's main job is to provide safety and easy access to your money. To do this, it invests only in debt and money market instruments that mature in 91 days or less. This means it's buying things like very short-term Commercial Papers, Certificates of Deposit, and Treasury Bills. 
• Inside a Gilt Fund: A Gilt Fund's goal is to eliminate credit risk. Therefore, it invests at least 80% of its money in Government Securities (G-Secs). By lending the majority to the government securities, it ensures the lowest risk of default. Its interest rate risk, however, will depend on the duration of the G-Secs it buys.
• Inside a Corporate Bond Fund: This fund invests at least 80% of its assets in Corporate Bonds that have the highest possible credit rating.
• Inside a Banking & PSU Fund: Similar to a corporate bond fund, this one has a very specific mandate. It must invest at least 80% of its money in the bonds issued byBanks, Public Sector Undertakings (PSUs), and Public Financial Institutions.
• Inside a Credit Risk Fund: This fund has the opposite strategy. Its job is to take higher credit risk for potentially higher returns. To achieve this, it must invest at least 65% of its money in corporate bonds that are rated below the highest-quality category.
• Inside a Dynamic Bond Fund: This fund is the master of mixing and matching. The fund manager can buy any of these ingredients—G-Secs, Corporate Bonds, Money Market instruments—and can hold them for any duration, from short-term to long-term. 

And there you have it. You now understand the full journey of your investment.You know how to pick a fund category based on your goal, how to check its risk using the PRC Matrix, and now, you know what actual securities the fund holds to achieve its objective.Just to take a few examples, a Liquid Fund is low-risk because it holds very short-term instruments. A Gilt Fund has low credit risk because it holds government IOUs. It's no longer a mystery.I hope this series has helped you feel more comfortable and confident about debt mutual funds. Thank you for coming along with me. Happy investing!

We are open to your feedback and suggestions - let us know how we can improve this or cover more topics further.

You can write to us at support@zerodhafundhouse.com.

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Published on Sept 9th, 2025