May 30, 2017 3 min read

Understanding the Various Types of Risk in Debt Funds

Know the risk factors involved in the various debt mutual fund schemes.
Are you thinking of investing in debt mutual funds? If you consider data as an indicator, you must have started investing in them a long ago as the asset under management of debt funds retail investors have risen by 40% as on March 31, 2017, over the previous year. With the falling interest rates in the banks and rising awareness in mutual funds in the recent past, the investors have gained attention in the debt mutual funds to earn higher interest on their money in the short-term period.

This tremendous increase has raised the benefits and growth prospects of the mutual fund industry, and there are greater chances to earn high worth on your investments in the same. But if you too are among those investors who believe that equities are risky and debt funds are safe players; then we would like to correct you here.

You must have heard the phrase “Mutual fund investments are subject to market risk, read all scheme related documents carefully.” This phrase implies to all the mutual funds in the market and not just equity funds. There are several types of risks involved in the different debt fund instruments, which need to be analysed by the investors to attain their objectives. Let’s help you understand all of them here.

Different Types of Debt Funds & Their Risk Appetite

1. Liquid Funds - These are the instruments which aim to provide the benefits like that of bank’s savings account by providing the same level of security and a higher rate of return. They have investments in the instruments which have the maturity of less than 91 days and are considered to be the least risky debt funds. The schemes in the category with less than one month maturity are considered to be very low-risk funds in this category.

2. Ultra Short -Term Funds & Short-Term Funds - This includes all those debt funds investments which are made for a period of six months to three years. The debt instruments in which they invest are not volatile to interest rate changes, and thus provide consistent returns with low risk profile.

3. Corporate Bond Funds - These are the instruments in the debt fund category which have investments in the corporate bond securities. The risk appetite in these funds differs as per the tenure of investment. Where the period of investment is less than a year, the risk is very high, while in the case of investment tenure being in the range of one to three years, the risk profile is medium for the portfolio of the investors.

4. Long-Term Bond Funds - These are the instruments which have investments in those debt securities which generate maximum possible returns in the longer tenure. If the investments held in these securities are for less than three years, then the risk exposure would be very high, while for a period of investment more than that of three years, the risk appetite is moderate to high.

5. Long-Term G-Sec Funds - Under this category of debt funds, the investments are made in such government securities which yield the best returns in the longer tenure. When the funds are invested in them for a period of three years or less, then the risk appetite is very high, while in a longer tenure, i.e., more than three years, the risk exposure is found in the range of moderate to high.

6. MIP with Less Than 25% Equity - Monthly Investment Plans (MIPs) are such debt funds which have a small part of the investment in the equity stocks, and offers regular income in the form of periodic dividend payouts. Due to exposure to equities, these funds are considered to be the riskiest in the debt mutual fund category. The investments held for less than three years in these funds are considered to be very high-risk funds, while those having the maturity of more than three years have medium to high-risk appetite.

So believing that debt funds are safe investment option is a wrong consideration. There are risk factors involved in all the debt investments, though they differ as per the investing tenure. Thus, if you are looking for investment in the debt mutual funds, you must match your risk appetite to that of the funds in which you intend to invest.

MySIPonline has the team of financial advisors, which tend to provide the best investment advice to the investors. So if you need any assistance in making the right choice of debt fund as per your risk appetite, you must get associated with us right away.