Debt Mutual Funds & Its Types

March 20, 2011   ·   0 Comments

Lesson 6: Debt Mutual Funds

An investment pool, such as a mutual fund or exchange-traded fund, in which core holdings are fixed income investments. A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt. The fee ratios on debt funds are lower, on average, than equity funds because the overall management costs are lower.


Debt Floater Funds

A bond or other type of debt whose coupon rate changes with market conditions (short-term interest rates). Also known as “floating-rate debt”. This type of instrument is more beneficial to the holder as interest rates are rising because it allows the holder to participate in the upward movement in rates. Conversely a floater is less advantageous to the holder when rates are decreasing because the rate at which they are receiving interest is declining.

Savvy’s Views: These type of Funds are too risky to be parking one’s money. The returns are also not reliable. 1 to 3 Year return across the Industry is between 6-7 % which is not good enough for Investing. Better Option will be Fixed Deposits & Recurring Deposits or Fixed Maturity Plans Funds.

In the next chapter, we will discuss about these Plans & their Comparison with Fixed Deposits & Reccuring Deposits.

Debt Long Term Funds(LTP Funds)

The main investing objectives of a debt fund will usually be preservation of capital and generation of income. Performance against a benchmark is considered to be a secondary consideration to absolute return when investing in a debt fund.

: Birla Sun Life GSec LTP


Saving 1000 Rs. per Month

  Value at 3 Years Value at 5 Years
Birla Sun Life GSec LTP(G) 43,236 Rs. 77,687 Rs.
Recurring Deposit @ 9 % 41,461 Rs. 75,989 Rs.
  • Assuming Recurring Deposit Rate of Interest at 9 %. This is not a Fixed Interest & Banks keeps on varying over time to time.
  • The other point to consider here is we are comparing the Best in the Peer of Long Term Fund with RD just to have a comparison & to give a Indication. The other LTP Funds returns may be lower than this Fund.

Debt Short Term Funds(STP Funds)

A mutual fund research agency, ultra short and liquid debt funds have returned 6.09 per cent and 6.02 per cent annually. While gilt, medium and long-term debt funds gave 5.63 per cent. This clearly indicates that short-term funds were able to stay ahead from longer-term funds, in terms of returns. A short-term debt fund usually has a small allocation to gilts, higher allocation to medium-tenure corporate bonds and lower cash holdings than..

Debt Liquid Funds

Liquid funds are ultra short-term debt funds that invest in money market instruments such as certificate of deposits, commercial paper and treasury bills, either on an overnight basis, ten days or a month. We present an analysis of liquid fund investing.

Floater Fund provides the liquidity option. Floater funds doesn’t have any exit load. The main idea is to provide the investor better returns than Savings account of a bank which provides 2.5 % returns. One can get a return of upto 5-6% for a shorter tenure of say 6 months. One will get the Liquid money in the Bank in hours after he opts for redemption.

Opt for a Flexi FD option available by the Axis Bank on all the Saving & Current Account. More than 25,000 Rs will be turned into an automatic FD’s for every 10,000 Rs in the Account. Interest will be calculated on the time the FD is not broken. That means if one takes the money out from his saving account say after 2 Months , the interest on the FD will be given for 2 months. If he takes the money out after 4months, Interest will be given accordingly for a Slab of 4 Months n so. If he doesn’t take the money out for more than 6 months, Interest will be given for slab of 6 months, the FD will be renewed again.

Also, Sweep in & Sweep out of money in a FD’s is an Automatic Process. Whenever the money is debited from the saving account, automatically the Amount will be deducted from the FD & new FD will be formed with the remaining amount  & whenever the Amount is Credited in the Account, Automatic Sweep in will happen to create a new FD by Every Monday.


Process of Sweep In & Sweep out is an Automatic Process. He can use the account as a normal Saving account without bothering of the amount in FD whereas  redeeming the money from the Floater Fund is still a pain as one may require the money at urgent basis where he couldn’t wait for  few hours for the process to happen.

Second is the Interest one will get is more than a normal Saving account usually ranging upto 6 % depending on the Transactions.

A type of investment vehicle that provides a specified monthly payment to the investor. This monthly payment is intended to be a stable form of income and is therefore typically suited for retired persons or senior citizens without other substantial sources of monthly income.

Returns of these type of Plans can be only measured if you calculate the amount of Monthly Income you are getting in the form of Dividend. Here is a Short Comparison of Best MIP Plans with the Long Term Debt Plan Funds if one would have opted for MIP Plan with a SIP.

Amount with SIP amount of 1000 Rs.

  Value at 3 Years Value at 5 Years
Birla Sun Life GSec LTP(G) 43,236 Rs. 77,687 Rs.
HDFC MIP LTP (G) 45,115 Rs. 83,455 Rs.
Reliance MIP(G) 45,357 Rs. 84,685 Rs.

A fixed deposit, that gives returns of around 9%, entails long-term capital gain tax of 33% (excluding the surcharge of 10%), while investing in a dividend option of a Debt fund, with maturity of up to a year, and entails a dividend distribution tax of 28.33%, which is better than post-tax returns of an FD. Dividend received from a mutual fund is tax free , but only at receivers hand . But mutual funds have to pay a tax on that dividend to Govt before giving it to us . So actually the tax is paid by mutual fund on behalf of us . This tax is called DDT  as Dividend Distribution Tax.

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Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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