Category 02 of 05
Debt funds — also called income funds — invest in bonds, government securities, and other fixed-income instruments rather than shares. Returns come from interest income plus any change in the price of the securities held. They're categorised almost entirely by how long the underlying paper runs, since that's what drives both risk and return here.
Two risks worth separating
Interest rate risk — bond prices move opposite to interest rates; longer-duration funds feel this more. Credit risk — the risk that an issuer doesn't pay. A fund can be low-duration and still be high-credit-risk if it holds lower-rated paper for extra yield.
Invests in securities maturing in exactly one day. About as close to risk-free as a mutual fund gets — the trade-off is a return that barely exceeds a savings account.
Holds instruments maturing within 91 days. Built for parking surplus cash for a short period with principal protection and reasonable liquidity — not for anyone chasing return.
A step up in tenor from liquid funds, aiming for slightly higher coupon income in exchange for a small amount of extra interest-rate exposure.
Invests in money market instruments — commercial paper, treasury bills, certificates of deposit — with maturities up to one year. A step further along the risk-return curve than liquid funds.
Named for the average maturity of the portfolio. Longer duration means more sensitivity to interest rate moves in either direction — more upside if rates fall, more downside if they rise.
The manager actively lengthens or shortens the portfolio's duration based on where they think interest rates are headed — extending duration when rates are expected to fall, and vice versa. The return depends heavily on the manager getting that call right.
At least 80% in the highest-rated corporate bonds. Prioritises credit quality over chasing yield from riskier issuers.
Deliberately holds a meaningful slice of lower-rated paper to earn a higher coupon. The name change from the old "Credit Opportunities Fund" label was itself part of SEBI's push to make scheme names state the risk plainly rather than dress it up.
At least 80% in debt instruments of banks, public sector undertakings, and public financial institutions — issuers generally considered lower credit risk given their public ownership or regulatory status.
Invests only in government securities. Carries no credit risk at all (the sovereign doesn't default in rupee terms) but full interest-rate risk — the "10-year constant duration" variant maintains that duration at all times by rule.
Holds bonds whose interest rate resets periodically in line with prevailing market rates, which largely removes interest rate risk from the equation — the coupon simply moves with the market instead of the bond's price moving against it.
Introduced by SEBI's February 2026 circular. Invests at least 80% in debt issued by companies in one specific sector — financial services, energy, infrastructure, housing, or real estate. Concentrated by design, the way a sectoral equity fund is: sector-specific credit and cyclical risk in exchange for targeted exposure.
Close-ended funds that buy securities maturing on (or just before) the fund's own maturity date, which largely locks in the yield and removes interest-rate risk. The trade-off is liquidity: units can't be redeemed early and can only be traded on an exchange if held in demat form.