Debt Fund Scheme: Features and Characteristics
A debt fund is a Mutual Fund scheme with focus on steady, regular and risk free return. It is an ideal investment instrument for parking surplus funds for short term. The fund invests mainly in money market instruments, corporate and government bonds and corporate debt securities.
Securities and Exchange Board of India (SEBI), is the regulator of mutual funds in India. In a recent review, SEBI revised the norms and features of mutual fund schemes including debt funds, for ensuring uniformity in categorization of various schemes announced by different mutual fund houses. The revised norms were published vide its circular SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017. The norms make it easy for the investor to compare similar schemes of different fund house and take judicious investment decision.
Bond fund and income fund are also widely used to refer to debt funds. The primary objective of debt fund is ensuring regular and steady income flows. They are mainly open ended funds or scheme. This kind of scheme is available for subscription and repurchase on a continuous basis.
Different types of debt funds are announced by each mutual fund house. Thus, there are number of schemes an investor can choose from depending on his requirement. Such schemes include gilt fund, liquid fund, corporate bond fund, money market fund, floater fund etc. The investment can be for short term to long term. Even overnight funds are available.
In terms of liquidity and risk, a debt fund is similar to bank deposits. But tax efficiency of debt funds is better. It is less volatile than equity funds. Debt funds ensures safety of capital and / or regular income for investors.
SEBI has specified conditions to be satisfied by each scheme type. They have also defined scheme types to prevent mis-selling.
Norms issued by SEBI for debt fund scheme categorization
The norms and definitions provided by SEBI for classification of debt fund schemes are provided below:
|
Sl No |
Category of debt fund |
Scheme Characteristics
|
Debt fund scheme feature description |
|
1 |
Overnight Fund** |
Investment in overnight securities having maturity of 1 day |
An open ended debt scheme investing in overnight securities |
|
2 |
Liquid Fund $ ** |
Investment in Debt and money market securities with maturity of up to 91 days only |
An open ended liquid scheme |
|
**Provisions of SEBI Circular No SEBI/IMD/DF/19/2010 dated November 26, 2010 must be followed for Uniform cut-off timings for applicability of Net Asset Value (NAV). $ All provisions mentioned in SEBI circular SEBI/IMD/CIR No.13/150975/09 dated January 19, 2009 in respect of liquid schemes continue to be applicable |
|||
|
3 |
Ultra Short Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months – 6 months |
An open ended ultra-short term debt scheme investing in instruments with Macaulay duration between 3 months and 6 months |
|
4 |
Low Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months- 12 months |
An open ended low duration debt scheme investing in instruments with Macaulay duration between 6 months and 12 months |
|
5 |
Money Market Fund |
Investment in Money Market instruments having maturity upto 1 year |
An open ended debt scheme investing in money market instruments |
|
6 |
Short Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year – 3 years |
An open ended short term debt scheme investing in instruments with Macaulay duration between 1 year and 3 years |
|
7 |
Medium Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 years – 4 years |
An open ended medium term debt scheme investing in instruments with Macaulay duration between 3 years and 4 years |
|
8 |
Medium to Long Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 – 7 years |
An open ended medium term debt scheme investing in instruments with Macaulay duration between 4 years and 7 years |
|
9 |
Long Duration Fund |
Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is greater than 7 years |
An open ended debt scheme investing in instruments with Macaulay duration greater than 7 years |
|
10 |
Dynamic Bond |
Investment across duration |
An open ended dynamic debt scheme investing across duration |
|
11 |
Corporate Bond Fund |
Minimum investment in corporate bonds- 80% of total assets (only in highest rated instruments) |
An open ended debt scheme predominantly investing in highest rated corporate bonds |
|
12 |
Credit Risk Fund^ |
Minimum investment in corporate bonds- 65% of total assets (investment in below highest rated instruments) |
An open ended debt scheme investing in below highest rated corporate bonds |
|
Words/ phrases that highlight/ emphasize only the return aspect of the scheme like Credit Opportunities Fund, High Yield Fund, Credit Advantage etc shall not be used in the name of the scheme. |
|||
|
13 |
Banking and PSU Fund |
Minimum investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions- 80% of total assets |
An open ended debt scheme predominantly investing in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions |
|
14 |
Gilt Fund |
Minimum investment in Gsecs- 80% of total assets (across maturity) |
An open ended debt scheme investing in government securities across maturity |
|
15 |
Gilt Fund with 10 year constant duration |
Minimum investment in Gsecs- 80% of total assets such that the Macaulay duration of the portfolio is equal to 10 years |
An open ended debt scheme investing in government securities having a constant maturity of 10 years
|
|
16 |
Floater Fund |
Minimum investment in floating rate instruments- 65% of total assets |
An open ended debt scheme predominantly investing in floating rate instruments |
