Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities,

Corporate Bonds, Money Market instruments and other debt securities of different time hori ons! Generally, debt securities have a fixed maturity date " pay a fixed rate of interest! The returns of a debt mutual fund comprises of #

$nterest income Capital appreciation % depreciation in the value of the security due to chan&es in market dynamics

Debt securities are also assi&ned a 'credit rating', (hich helps assess the ability of the issuer of the securities % bonds to pay back their debt, over a certain period of time! These ratin&s are issued by independent ratin& or&anisations such as C)*+, C*$S$,, F$TC-, Brick(ork and $C*)! *atin&s are one amon&st various criteria used by Fund houses to evaluate the credit (orthiness of issuers of fixed income securities! There is a (ide ran&e of fixed income or Debt Mutual Funds available to suit the needs of different investors, based on their.

$nvestment hori on )bility to bear risk

Different types of Debt Mutual Funds

There are different types of Debt Mutual Funds that invest in various fixed income securities of different time hori ons! Some of the debt based " blended cate&ory products /(hich have both debt and e0uity allocation1 are as follo(s #

Liquid Funds / Money Market Funds

These funds invest in hi&hly li0uid money market instruments and provide easy li0uidity! The period of investment in these funds could be as short as a day! They aim to earn money market rates and could serve as an alternative to corporate and individual investors, for parkin& their surplus cash for short periods! *eturns on these funds tend to fluctuate less (hen compared (ith other funds!

Ultra Short Term Funds

+arlier kno(n as Liquid Plus Funds, they invest in very short term debt securities (ith a small portion in lon&er term debt securities! Most ultra short term funds do not invest in securities (ith a residual maturity of more than 2 year! )lso referred to as Cash or Treasury Mana&ement

Funds, Ultra Short Term Funds are preferred by investors (ho are (illin& to mar&inally increase their risk (ith an aim to earn commensurate returns! $nvestors (ho have short term surplus for a time period of approximately 2 to 3 months should consider these funds!

Floating ate Funds

These funds primarily invest in floatin& rate debt securities, (here the interest paid chan&es in line (ith the chan&in& interest rate scenario in the debt markets! The periodic interest rate of the securities held by these products is reset (ith reference to a market benchmark! This makes these funds suitable for investments (hen interest rates in the markets are increasin&!

Short Term ! Medium Term "ncome Funds

These funds invest predominantly in debt securities (ith a maturity of upto 4 years in comparison to a *e&ular $ncome Fund! These funds tend to have a avera&e maturity that is lon&er than ,i0uid and 5ltra Short Term Funds but shorter than pure $ncome Funds! These funds tend to perform (hen short term interest rates are hi&h and could potentially benefit from capital &ains as li0uidity comes back to the market and interest rates &o do(n! These funds are suitable for conservative investors (ho have lo( to moderate risk takin& appetite and an investment hori on of 3 to 26 months!

"ncome Funds# $ilt Funds and other dynamically managed debt funds

These funds comprise of investments made in a basket of debt instruments of various maturities " issuers! These funds are suitable for investors (ho (illin& to take a relatively hi&her risk as compared to corporate bond funds,and have lon&er investment hori on! These funds tend to (ork (hen entry and exit are timed properly7 investors can consider enterin& these funds (hen interest rates have moved up si&nificantly to benefit from hi&her accrual and (hen the outlook is that interest rates (ould decrease! )s interest rates &o do(n, investors can potentially benefit from capital &ains as (ell! ) fe( types of dynamically mana&ed debt funds are mentioned belo( #

"ncome funds invest in corporate bonds, &overnment bonds and money market instruments! -o(ever,they are hi&hly vulnerable to the chan&es in interest rates and are suitable for investors (ho have a lon& term investment hori on and hi&her risk takin& ability! +ntry and exit from these funds needs to be timed appropriately! The correct time to invest in these funds is (hen the market vie( is that interest rates have touched their peak and are poised to reduce! $ilt Funds invest in &overnment securities of medium and lon& term maturities issued by central and state &overnments! These funds do not have the risk of default since the issuer of the instruments is the &overnment! 8et )sset 9alues /8)9s1 of the schemes fluctuate

due to chan&e in interest rates and other economic factors! These funds have a hi&h de&ree of interest rate risk, dependin& on their maturity profile! The hi&her the maturity profile of the instrument, hi&her the interest rate risk!

Dynamic %ond Funds invest in debt securities of different maturity profiles! These funds are actively mana&ed and the portfolio varies dynamically accordin& to the interest rate vie( of the fund mana&ers! These funds $nvest across all classes of debt and money market instruments (ith no cap or floor on maturity, duration or instrument type concentration!

&orporate %ond Funds

These funds invest predominantly in corporate bonds and debentures of varyin& maturities that offer relatively hi&her interest, and are exposed to hi&her volatility and credit risk! They seek to provide re&ular income and &ro(th and are suitable for investors (ith a moderate risk appetite (ith a medium to lon& term investment hori on!

&lose 'nded Debt Funds

Fi(ed Maturity Plans )FMPs* are closed ended Debt Mutual Funds that invest in debt instruments (ith a specific date of maturity that is less than or e0ual to the maturity date of the scheme! Securities are redeemed on or before maturity and proceeds are paid to the investors! FM:s are similar to passive debt funds, (here the portfolio mana&er buys and holds the debt securities for the entire duration of the product! FM:s are a &ood option for conservative investors, as they do not carry any interest rate risk provided the investor stays invested until the maturity of the product! They are also a tax efficient investment option!

+ybrid Funds

They brid&e the &ap bet(een e0uity and debt schemes by investin& in a mix of e0uity and debt securities! This adds a considerable amount of risk to the product and (ill suit investors lookin& for commensurate returns (ith hi&her levels of risk than re&ular debt funds!

Monthly "ncome Plans )M"Ps* strive to offer the benefit of diversification across asset classes by investin& a proportion of the portfolio in debt securities /;<= to 3>=1 (ith a smaller allocation in e0uity securities /> = to 4< =1! )s the correlation bet(een prices of e0uity and debt is lo(, this product endeavors to &ive an investor returns that are relatively hi&her than debt market returns! M$:s can be classified as debt oriented hybrids that seek to #

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&enerate income from the debt securities maximise the benefits of lon& term &ro(th from e0uity securities aim for periodic distribution of dividends

-o(ever, an important point to be noted is that monthly income is not assured and it is sub?ect to the availability of distributable surplus in the fund!

&apital Protection ,riented Funds are closed ended funds that are hybrid in nature7 they allocate money to debt and e0uity securities! The allocation to debt securities is done in such a (ay that at the end of the term of the product, the value of debt investment is e0ual to the ori&inal investment in the fund! The e0uity portion aims to add to the returns of the product at maturity! These funds are oriented to(ards protection of capital and do not offer &uaranteed returns! Say, for example, ))) bonds are 0uotin& at interest rate of 2<= p!a! for a > year term!
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This means that at the end of > years, the investment of *s! 2<< in such bonds (ould be (orth *s! 2@2!<>, assumin& reinvestment of the interest! An the other hand, if one invests *s! @6!<3 in such bonds, the value of the bonds at the end of > years (ould be *s! 2<<!

"n such a case# the allocation bet-een equity and debt -ould be ./ 0 12 respectively! So, if the e0uity value reduces to ero, the investor &ets back the ori&inal amount invested!

The asset allocation is a function of prevailin& interest rates on hi&h 0uality /))) rated1 bonds! $t is mandatory for the fund to be rated by at least one ratin& a&ency in order to be called a capital protection oriented fund! Debt securities held in the portfolio must be of hi&hest ratin&!

Multiple 3ield Funds are close ended income funds that aim to optimi e income from debt securities and potential &ro(th from e0uity! They aim to limit the do(nside by investin& in rated debt instruments of reputed issuers! Throu&h a limited e0uity exposure, they aim to provide capital appreciation by investin& in shares of companies (ithout any sector or market capitali ation bias! This exposure (ill help to participate in the &ro(th of these companies thus seekin& to provide the portfolio (ith an element of potential lon& term capital appreciation!