What Changes SEBI Introduced in the New Mutual Fund Debt Categories?- Part 1 - MySIPonline
Jul 07, 2018 5 min read

What Changes SEBI Introduced in the New Mutual Fund Debt Categories?- Part 1

Read this blog to find out all about the newly created debt categories(first 9)
As the market regulator (SEBI) introduced several changes after the implication of new rules of re-categorization and rationalization, debt mutual fund schemes experienced some major changes. Now, these schemes are sub-divided into 16 categories. This categorization has been done on the basis of the investment ground of a particular scheme.

In this write-up, the readers will know all about the newly formed debt categories, and thus it will be easier for them to set their expectations right and invest according to the risk profile.

What Are the Newly Formed Debt Categories?

The categorization can be broadly classified into money market funds, duration funds, and credit opportunity funds. Besides, the 16 categories in general include:

1. Overnight Funds

Such schemes are basically open-ended which invest in overnight securities with a maturity horizon of one day.

  • Risk Analysis: This category is probably the safest of all keeping risk into consideration. While looking at the risk factor, both- credit risk and the interest rate risk will be quite low, almost close to negligible.
  • Suitability: Such schemes will be more relevant for the institutional investors or the corporate investors where they are looking for short-term or literally overnight investments as the name suggests. This may not be the best pick for a retail investor.

2. Liquid Funds

These funds will have investments in debt and money market securities which have maturity duration of 91 days.

  • Risk Analysis: The risk is quite low in such schemes; thus the returns will also be lower than some of the other category schemes.
  • Suitability: If you are willing to accomplish a short-term goal being risk averse or secure investor, then such schemes can be your ideal choice. Institutional money is quite prevalent in such segments, but even high net-worth individuals and retail investors can park their funds. All in all, it is largely for corporate investors, but if an investor wants to deploy for a couple of days, weeks, or months, then it can be a good pick for retail investors as well.

3. Ultra Short Duration Funds

Such schemes invest in debt and money-market securities which have Macaulay duration between three and six months.

  • Risk Analysis: Such schemes help investors to avoid interest rate risks, yet they are riskier and offer better returns than most of the other money market instruments.
  • Suitability: Such schemes are known to provide better risk-adjusted returns to investors. Thus, they are considered an ideal investment instrument for investors with an investment horizon of around 6-12 months.

4. Low Duration Funds

These schemes will too invest in debt and money market securities, but the Macaulay duration for them lies in between six to twelve months.

  • Risk Analysis: Such schemes usually posses low to moderate risk.
  • Suitability: They are suitable for investors who are looking for the generation of reasonable returns over short to medium term and investment in fixed income securities and money market instruments.

5. Money Market Funds

They will invest majorly in money market instruments such as treasury bills which have a maturity period of 365 days.

  • Risk Analysis: In such schemes, the risks will be contained very well.
  • Suitability: If an investor is willing to invest for a little longer than 6-12 months, and doesn’t want credit risk tossed like in terms of low duration fund, then he/she can go for a money market schemes which offer more comfortable earning.

6. Short Duration Funds

Such schemes will majorly invest in debt and money market instruments which have a maturity duration of one to three years.

  • Risk Analysis: As the time horizon increases, the risk factor also gets decreased. Thus, such schemes posses low-moderately low risk.
  • Suitability: Suitable for investors who are looking forward to generating regular income through a diversified portfolio of fixed income securities.

7. Medium Duration Funds

With a Macaulay duration in between three to four years, the investment of such schemes will too be in debt and money market instruments.

  • Risk Analysis: The risk possessed by such funds lie in between low to moderately low.
  • Suitability: The investors have an opportunity to generate attractive returns with a moderate degree of liquidity through investments in debt and money market instruments. It is an ideal bet for people who are willing to invest for around three to four years and do not want to expose themselves to higher risk.

8. Medium to Long-Duration Funds

With investment in debt and money market instruments, such schemes will have a Macaulay duration of around 4 to 7 years.

  • Risk Analysis: The risk factor in such funds too ranges in between low to moderately low.
  • Suitability: The investors have an opportunity to generate attractive returns with a moderate degree of liquidity through investments in debt and money market instruments. It is an ideal bet for people who are willing to invest for around five to six years and do not want to expose themselves to a higher risk of equities.

9. Long Duration Funds

With investment in debt and money market instruments, such schemes will have a Macaulay duration greater than seven years.

  • Risk Analysis: Higher duration funds are riskier, however, they can deliver higher returns during a softening interest rate regime.
  • Suitability: One can generate attractive returns with investment for longer horizons, say for around eight years.

For learning about the other categories, stay tuned with us at MySIPonline. The purpose of stating this categorization is to let our investors make the right decision when it comes to investing in debt funds.

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