Debenture Mutual Funds and its type

This topic is discussed in one of my blogs on Debenture and can go through it. A Debenture is nothing but legal contractual papers issued by government or Firms to the investor, which serves as a certificate to pay the investor back the amount, with a fixed rate of interest in the pre-decided interval, and it is also called as Bond.

Types of Debenture Mutual Fund

So why any organization or government will repay with interest?… because both the company and Government requires money for their future expansions and long term plans to execute. The fund required for the same may be acquired in many ways and one of the ways is to take loans or debt from the persons who are willing to invest with the firm in hope of generating a return in the future. So in the case of debenture, organizations borrow money from lenders and repay them the money borrowed with fixed interest. So, it is somewhat like Fixed Deposits where the investor will be paid back the money invested with interest.

There are different types of Bonds floated in the market depends on the maturity period or the time for which money is borrowed by the organization. Short term Bonds may mature in days or weeks to Long term bonds may take up to 20 years to mature. Usually, long term bonds are issued by the Government while Short term bonds are issued by both Government and Organisations.

The thing to remember here is that we must buy the product which matches with our needs and time period of investment that means if we need the money back after one year than we must go for short term bonds and we do not want money in the near future then we can go for long term bonds. So if we are investing in the organization, then why we are taking a Mutual Fund? We can go for purchasing a bond directly from the company… 

Yes, we can, and actually, investors do the same in the form of Company Deposits. But the problem with this way is we do not have enough exposure to the market system and can not track the future of the company. So better this task be handed over to a qualified person who is well versed with market system and can predict the future and generate a return for you to whom we term as Fund Manager.

Also if you are picking the company on own then you may be picking debt papers or bonds of limited companies, and if at all market tumble than the loss of investor will be in the same proportion. But in Mutual Fund, Fund Manager keeps many firms in one basket, so that if at all one or two firms show negative returns during market fall, other firms will significantly generate good returns. So Fund Manager generates positive returns by keeping no of products in one basket which is called diversification of the portfolio.

Type of Debtenture mutual Fund 

Debenture mutual fund or Bonds are classified based on the maturity period i.e Long term and Short term and as per the quality of the paper issued by the fund. If you are carrying a good quality paper in your basket then the return will be lesser as compared to low-quality paper. But if you want your money to be associated with minimal risk then go for high-quality papers.

Liquid Funds

Liquid fund is a category of Debenture Mutual Fund in which your money will be invested mostly into the money market tools like Certificate of Deposits, Treasury Bills, Commercial Papers, and Term Deposits. Maturity periods of these types of Funds are very less usually with an average of 3 months ( holding period of this fund is 3 months on average) and it makes it easy for Fund Manager to cater to immediate redemption requests by investors.

Liquid Fund

As per new guidelines issued by SEBI, you can request for redemption of up to Rs 50,000 a day from your liquid fund or 90% of ur money in your liquid fund whichever is lower. Also if you have invested in more than one liquid fund than you can place a request for redemption equal to the 50,000 / 90% of money multiplied by the number of liquid funds you are holding.

Liquid fund as invests in Debenture mutual fund tools so they are very minimal risk associated with them and you can be almost sure that your capital is safe. Debit caŕd facility for access your liquid fund is allowed by some fund houses now a 

Benefits of liquid funds

⇒ These types of debenture Mutual Funds have no lock-in period means the company does not demand your money to be kept invested with fund houses for the defined term. So you can withdraw your fund anytime. Withdrawals are processed within 24 hours on business days and you can place a request for withdrawal up to 2 PM on business days. The money will be credited back to your account by 10 AM next morning i.e within 21 hours.

⇒ Lowest interest rate risk among debt funds as they primarily invest in fixed income securities with a short maturity.

 ⇒ No Entry load and exit loads.

Returns from liquid funds

Liquid funds are best in terms of high returns with short term maturity and almost liquidity at any time having minimal risk.

Ultra Short Term Funds

These types of debenture mutual fund is another type of Debenture Fund in which the maturity period of the bond is from 3 to 9 months. These Bonds invest in securities that have a maturity period of up to 18 months as well. This type of fund can be seen as very close to the liquid funds with maximum liquidity with minimum risks associated with it but you have to constantly track it for the performance of funds. There are ratings from which you can judge the performance of funds in the past and the rating will help you in choosing the right asset for your needs.

Triple AAA rating is the safest kind of bond u can buy, whereas Double BB means a fairly high level of risk so it is usually safe to stay with large funds.

Ultra short-term funds can be used by investors for both short-term and long term investment purposes or else can go for systematic transfer plans (STPs) in place of liquid funds. These types of debenture mutual Funds usually give a return of about 7-9% provided all other conditions are met. The thing to note here is that Fund house charges a fee from investor called Expense Ratio which may be up to a maximum of 1.05 % of total investment. 

Also, the returns generated over the investment in these funds are taxable and the rate of the tax depends on the time for which you made an investment like short term capital gain (STCG) and long term capital gain(LTCG). STCG is applicable for the investment made for less than 3 years while LTCG is for the investment made over 3 years.

One major mistake we do while investing in Mutual Funds is that we start hoping for the Long Term Funds to generate returns over Short Term which is not possible with market volatility.

Other Debenture Funds based on duration are:

Name of FundMaturity Period
Overnight Funds01 Day
Low Duration Fund06 to 12 Months
Money Market FundUp to 01 Year
Short Duration fund01 to 03 Years
Medium Duration Fund03 to 04 Years
Medium to Long Duration Fund04 to 07 Years
Long Duration FundAbove 07 Years
Dynamic BondInvestment across Duration

Other Miscellaneous Funds

Corporate Bond Fund – Minimum Investment in Corporate Bond is @ 65%, the highest rating is AAA rated

Credit Risk Fund – Minimum Investment in Corporate Bond is @ 65%, the Highest rating is AA rated

Banking and PSU Fund – Minimum Investment in Banking and PSU Debt fund @ 80 %

Gilt Funds – Minimum Investment in Government Securities @ 80 %.

Please note down that Debenture Funds are not Risk-Free and if Investing into it then look for credit risk. Credit risk funds are also a type of Debt Mutual Funds that invest @ 65 % of their portfolio in lower than AA-rated papers. This means these schemes opt for generating high returns by taking higher credit risk. Lower-rated papers generate high returns when their ratings move up. If a bond with a lower rating in the portfolio exposed to downgrade, it may be difficult for the Fund Manager to exit the investment