Types of Mutual Funds

Types of Mutual Funds

2019/02/25

There are various types of debt instruments such as fixed deposit, government securities, money market securities, company bonds & company FD. Investment in debt is considered to be less risky as compared to investment in equities. There are various types of debt funds that invest in all these debt instruments.Debt Mutual Fund

Types of Debt fund

Floating rate fund:

As the name suggest, floating rate funds invests in securities that have floating rate. In addition these funds also invest in fixed rate securities that are swapped for floating rate securities.  How many times the interest rate for floating rate securities change depends upon the change in benchmark rate. Since floating rate funds have the variable interest rates, it is advantageous as they are less impacted by the changes in the market interest rates. Thus, floating rate bonds are considered to be much better than fixed bonds. In case of fixed rate bonds, any change in interest rates will have an opposite impact on the fixed bonds portfolio. However, floating rate funds do have liquidity risk. Liquidity risk arises due to the probability of limited trading of these securities.

Gilt funds:

Gilt funds invest their portfolio in government securities. Gilt funds are considered to be safe owing to the government backing. But still GILT funds cannot be termed as safest. This is mainly because of the volatility in the interest rate movements.

Money market/liquid funds/ultra short term funds:

Money market or liquid funds invest in money market securities such as certificate of deposits, commercial paper, Treasury bill, repo etc. Money market securities have higher liquidity owing to is short term nature. Money market funds are considered to be better than fixed deposit as far as returns are concerned.

Balanced fund:

Balanced fund invest partly in equity and partly in debt. Balanced fund are considered to be perfect for investors with medium risk appetite and who want benefits of both, equity as well as debt.

Corporate bond funds and junk bond funds:

Apart from the funds mentioned above, there are also corporate bond funds and junk bond funds. Corporate bonds invest in corporate securities. Many corporate issue bonds in order o raise the capital for their firms. Corporate bonds are rated by the credit rating agencies. Junk bonds invest in debt securities that are considered to be risky on the basis of their credit ratings. Bonds which are rated lowest in the investment grades by the rating agencies are termed as junk bonds.

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