A guide to SEBI debt fund categoriesSEBI has laid down 16 debt fund schemes in its classification system announced in October 2017. We take you through them in this article. (Read: A Guide To SEBI’s New Equity Funds Categories)

The new classification system grades funds along three broad categories. First, on the level of interest rate risk going from overnight funds (least risky) to long duration funds (most risky). Second, on credit risk, going from gilt funds (least risky) to credit risk funds (most risky). Third on the type of bonds held including Banking and PSU funds and Floater Funds.

Interest Rate Factor

In this type of grading, the level of risk is least in overnight funds and most in long-duration funds. The system uses Macaulay Duration which is a technical indicator and difficult to directly interpret. However, it converts easily to ‘Modified Duration’ which tells you the percentage change in portfolio value when there is a percentage change in interest rates. For example, a one percent change in interest rate will cause a five percent change in a fund’s value if the modified duration is five.

Overnight Fund

Invests in securities having a maturity of one day.

Liquid Fund

Invests in debt and money market securities with maturity up to 91 days.

Ultra short-term debt fund

Invests in debt and money market securities such that the Macaulay Duration of the portfolio is between 3 and 6 months.

Low Duration Fund

Invests in debt and money market instruments such that Macaulay Duration is between 6 and 12 months.

Money Market Fund

Invests in money market funds with maturity up to one year

Short Duration Fund

Invests in debt and money market instruments such that the Macaulay Duration of the portfolio is between 1 and 3 years

Medium Duration Fund

Invests in debt and money market instruments such that the Macaulay Duration of the portfolio is between 3 and 4 years.

Medium to Long Duration Fund

Invests in debt and money market instruments such that the Macaulay Duration of the portfolio is between 4 and 7 years.

Long Duration Fund

Invests in debt and money market instruments such that the Macaulay Duration of the portfolio is greater than 7 years.

Dynamic Bond Fund

Invests across durations

Credit Risk Factor

These categories of funds are defined by their credit risk (risk of default) rather than interest rate risk. That doesn’t mean that they don’t have interest rate risk. It just means that credit risk can play a more important role here. Lower credit rated bonds usually pay higher rates which makes them a source of higher returns and higher risk. A fund which picks the right bonds can earn higher rates while avoiding the risk of default. Credit risk is highest in ‘Credit Risk Funds’ and lowest in Gilt Funds which invest only in government bonds.

Credit Risk Fund

Minimum investment in corporate bonds (below highest rated instruments) at 65% of assets.

Gilt Fund

Minimum investment in Gsecs (Government Securities) at 80% of assets

Gilt Fund with 10-year constant duration

Minimum investment in Gsecs at 80% of total assets such that Macaulay Duration of Portfolio is equal to 10 years

Type of Bonds Factor

Some investors are more comfortable with specific types of bonds such as bonds issued by public sector enterprises or bonds with floating interest rates. The funds mentioned below are designed for these types of investors.

Banking and PSU Fund

Minimum investment in debt instruments of banks, public sector undertakings and public financial institutions at 80% of total assets.

Corporate Bond Fund

Minimum investment in corporate bonds (only highest rated instruments) at 80% of assets.

Floater Fund

Minimum investment in floating rate assets – 65% of total assets. Floating rate assets are debt securities whose rate is tied to overall interest rates in the economy.

Also read

A guide to SEBI’s new Equity Funds categories

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.