8 Types Of Debt Funds You Need To Know About In 2023

“Debt Funds” is an umbrella term used to describe mutual funds that primarily invest in bonds, T-bills, commercial paper, money market, and other debt securities. 

The distinction within debt mutual funds lies in the type of debt securities they invest in (bonds, money market, etc) and the duration for which they hold their investments (overnight, 3-6 months, etc). 

Understanding the various types of debt funds will help you gauge the right fit for your portfolio based on your risk profile and investment goals. Let’s explore 8 of the most popular types of debt funds in India.

Types Of Debt Mutual Funds

#1. Short Term Funds

Short term funds invest in securities that mature in 1-3 years. Basically, that’s the time it takes for the fund to get its money back. Short duration funds generally invest in bonds issued by solid companies. 

As a result, short term funds have been known to generate better returns than bank FDs, in the range of 5-6%. Short term funds carry a relatively low-risk than equity and hybrid mutual funds. 

Facts Of Short Term Funds

1. Type: Open-ended debt fund 

2. Ideal for: 1-3 years

3. Average returns: 5-6%

4. Risk: Low

Note: This category can include any debt fund that has a portfolio maturity of one year or less. 

#2. Ultra Short Term Funds

Ultra short term funds invest in bonds and other debt instruments that mature in 3 to 6 months. These funds are ideal for the immediate short term and as a place to park cash for Systematic Transfer Plans (STPs). 

The average bank savings account generates 3% returns at best. Ultra short term funds fare better and have been known to produce returns between 4-5% on average.

As far as risk goes, ultra short term funds are known to be safer than most debt funds and equity funds because of the ultra-short lending period/investment tenure.  

Facts Of Ultra Short Term Funds

1. Type: Open-ended debt fund 

2. Ideal for: >3 months

3. Average returns: 4-5%

4. Risk: Low

Best Ultra Short Term Funds

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#3. Liquid Funds

Liquid funds are the cooler cousins of ultra-short duration funds. The popularity of liquid funds is down to the high liquidity, safety, and solid returns that they offer. 

Furthermore, liquid mutual funds can have been known to produce better returns than both the average bank savings account and FDs. The average returns range from 5-7%. 

You can access the Cube ATM on the Cube Wealth app that lets you withdraw money instantly from your Nippon India Liquid Fund investment to your bank account. 

Facts Of Liquid Funds

1. Type: Open-ended debt fund 

2. Ideal for: 0-3 years

3. Average returns: 5-7%

4. Risk: Low

Best Liquid Mutual Funds

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#4. Income Funds

Income funds tend to prioritize capital preservation by investing in low risk, low reward debt securities that generate a regular income. The term income funds are used to refer to these debt mutual funds:

a. Money Market Funds   

Money market funds invest in high rated debt securities found in the money market that are usually certificates of deposit, commercial papers, repo agreements, and others. 

Money market funds offer above-average safety because their portfolio matures in one year. As a result, the returns generated by money market funds are predictable in the range of 3-4%.

Facts Of Money Market Funds

1. Type: Open-ended debt fund 

2. Ideal for: 0-3 years

3. Average returns: 3-4%

4. Risk: Low

Best Money Market Funds 

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b. Corporate Bond Funds 

Corporate bond funds invest in debt securities issued by large corporations either for the short or long term. Corporate bonds pay a higher premium than other bonds because of the credit risk involved. 

Facts Of Corporate Bond Funds

1. Type: Open-ended debt fund 

2. Ideal for: 0-3 years

3. Average returns: 6-8%

4. Risk: Moderate

Best Corporate Bond Fund 

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c. Banking & PSU Debt Funds

Banking & PSU debt funds generally invest in bonds issued by banks, public sector undertakings, and the government. The bonds issued by these entities are high grade, low-risk investments that generate solid returns. 

Facts Of Banking & PSU Debt Funds

1. Type: Open-ended debt fund 

2. Ideal for: 0-3 years

3. Average returns: 6-8%

4. Risk: Low

Best Banking & PSU Debt Funds

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#5. Monthly Income Plans

Debt funds that fall under this category focus on generating a monthly income for the investor by investing in high-quality debt securities like government bonds and commercial paper. 

A part of the fund’s portfolio may invest in equity as well. However, the debt securities provide enough safety and cover for the returns to be predictable in the range of 2-5%. 

Facts Of Monthly Income Plans

1. Type: Open-ended debt fund 

2. Ideal for: 3+ years

3. Average returns: 2-5%

4. Risk: Low

Note: Monthly income plan debt funds are currently not recommended on the Cube Wealth app by Cube’s advisor, Wealth First. 

#6. Fixed Maturity Plans

Debt funds that fall under fixed maturity plans are generally close-ended, which means you can invest in them only during the new fund offer (NFO). Funds from this category allow you to choose an investment tenure (lock-in). 

Facts Of Fixed Maturity Plans

1. Type: Close-ended debt fund 

2. Ideal for: Varies

3. Average returns: 5-7%

4. Risk: Low

Note: Fixed Maturity Plan debt funds are currently not recommended on the Cube Wealth app by Cube’s advisor, Wealth First. 

#7. Dynamic Mutual Funds

Interest rate fluctuations have an impact on the desirability of bonds. If interest rates go up, bonds lose value. On the other hand, bonds gain value when interest rates fall. 

The management team of a dynamic mutual fund looks to leverage these changes to produce returns for their investors. Dynamic funds have historically produced 6-8% returns on average. 

Facts Of Dynamic Mutual Funds

1. Type: Open-ended debt fund 

2. Ideal for: 0-3 years

3. Average returns: 6-8%

4. Risk: Low

Best Dynamic Mutual Fund

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#8. Debt Oriented Hybrid funds

Hybrid funds invest in both debt and equity. However, certain hybrid funds have more exposure to debt than equity. They’re known as debt oriented hybrid funds. The returns vary from 5-7% on average.   

Note: Debt Oriented Hybrid funds are currently not recommended on the Cube Wealth app by Cube’s advisor, Wealth First. 

How To Invest In Best Performing Debt Funds In India?

Debt funds are relatively safe and produce better returns than FDs and bank savings accounts. But there are simply too many options to choose from. 

This choice alone can put a damper on the investing experience. However, there’s an effective solution - the Cube Wealth app. Cube gives you access to world-class investment advice from Wealth First. 

Wealth First helps you cut through the noise by picking and curating a handful of the best performing debt funds in India. Furthermore, the recommendations are tailored to your risk profile and investment goals.

Here’s how you can access market-beating financial advice in a few clicks!

1. Download Cube Wealth 

2. Complete eKYC formalities

3. Take the risk analysis quiz

4. Get curated debt funds

5. Start investing

That’s it! Begin your wealth creation journey today by downloading the reliable and intuitive Cube Wealth app. Take Me To The App

Here’s how handpicked mutual funds work on the Cube Wealth app

FAQs

1. Why should I consider investing in debt funds in 2023? 

Ans. Debt funds can be an attractive choice in a diversified portfolio, providing stability, regular income, and the potential for capital preservation. They are often used to balance the risk associated with equity investments.

2. What is the risk associated with debt funds? 

Ans. Debt funds carry varying degrees of risk, depending on the type of securities they invest in. While they are generally considered lower risk than equity funds, factors like interest rate changes and credit risk can impact their returns.

3. How do I choose the right type of debt fund for my investment goals? 

Ans. Your choice should be based on your financial objectives, risk tolerance, and investment horizon. Different debt funds are suited for different needs, so assess your needs and consult with a financial advisor if necessary.

4. Are debt funds suitable for short-term or long-term investments? 

Ans. Debt funds can be suitable for both short-term and long-term investments. Short-term funds may invest in securities with shorter maturities, while long-term funds may have a focus on longer-duration bonds.

Conclusion

In 2023, the world of debt funds offers a diverse array of investment options for those seeking stability and income in their portfolios. The eight types of debt funds discussed in this guide cater to a wide range of investment needs, from low-risk to higher-yield strategies. As with any investment, it's essential to align your choices with your financial goals, risk tolerance, and investment horizon. Whether you're looking for capital preservation, regular income, or a balance between the two, the debt fund landscape provides solutions to cater to your needs. Conduct thorough research, stay informed about market conditions, and consider consulting with a financial advisor to make well-informed investment decisions.

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