Types of Debt Funds in India -After SEBI Categorization

What are the types of Debt Funds in India after the SEBI’s Categorization and Rationalization of Mutual Fund Schemes? How are they classified now? Let us discuss on this aspect in detail.

The Debt Funds in India after SEBI’s Categorization and Rationalization of Mutual Fund Schemes are mainly divided into 16 types. However, to make it simple, let us understand and re-categorize them for our own purpose.

Types of Debt Funds in India -After SEBI Categorization

In below list, I will try to list all types of debt funds in India as per SEBI’s Categorization.

Types of Debt Funds in India -After SEBI Categorization complete list

You noticed that there are 16 types of Debt Funds mentioned by SEBI. But you noticed one new word in this. This is Macaulay duration. 

What is meaning Macaulay Duration?

Macaulay Duration means the time an investor would take to get back all his invested money in the bonds by way of periodic interest (coupon) as well as principal repayments (at maturity). It is named after Frederick Macaulay who developed this concept analyzing the risk of the bonds.

It is confusing for you (and of course me also!!) if you try to dig deep to understand how it is calculated. Hence, for simplicity purpose, I just provided you the meaning of it.

You just keep one thing in mind that higher the Macaulay Duration means higher the risk. Because of longer the tenure of the bond, the more sensitive the Macaulay duration to changes in yield.

You may be aware that bond prices are inversely proportional to interest rates. Suppose there is a fall in the interest rate, then the price of the bonds will rise and vice versa.

You must stay with funds or bonds with longer maturity when interest rates are expected to go down and move to bonds or funds with short maturity when interest rates are either likely to stay stable or go up. This makes it important for you to know the Macaulay Duration of a fund before buying it. It is the clear indication of the risk involved in any bond fund.

However, you noticed that SEBI’s Debt Fund Categorization will not mention the Macaulay Duration for all types of Debt Funds. Macaulay Duration is applicable only to 8 categories of funds. In such situation, the other factors to analyze the risks will play a major role. Hence, along with this Macaulay Duration, you must also look for below criteria before jumping into any debt fund categories.

Credit Risk-

Debt Mutual Funds invest in treasury bills, government securities, Certificate of Deposits (CDs), Commercial Papers (CPs), bonds, money market instruments and many more. The credit quality of these underlying instruments are measured in terms of ratings.

Usually higher the ratings lead to lower the return or risk. It is a misconception among many that credit risk refers to the risk of default by the bond issuing entity. However, the truth is something different.

There is a possibility that the credit rating of a bond or instrument the fund is holding may change at any point of time. Let us say ABC Debt Fund holding the bond of XYZ which is rated as AAA by credit rating agencies (highest rating).

It does not mean that this rating is permanent. It may change at any point of time if the company XYZ’s finance changes.

Hence, never be in a misconception that credit rating refers to default risk and also credit rating of bond will NEVER CHANGE.

Modified Duration-

It is a measurement of a bond’s sensitivity to movements in interest rates. It is usually measured in years. For example, if debt mutual fund with the modified duration of 3.1% means if there is a 1% interest rate movement then the fund will undergo the movement of 3.1%.

Hence, higher the modified duration means higher the interest rate risk.

Average Maturity-

A debt fund portfolio usually consists of a number of bonds where each could have a different maturity date. Maturity is the time period remaining before which a bond comes up for repayment by the issuer. Average maturity is simply the weighted average time left up to the maturity of the various bonds in a portfolio.

Higher the average maturity greater the interest rate risk of a debt fund.

Exit Load-

Some category of funds will charge you exit load. Hence, you have to be careful while selecting the funds and the conditions apply regarding the load structure.


Remember that Equity Funds and Debt funds are taxed differently. Hence, you must understand the taxation part as well before jumping into investment. I tried to explain the same in below image.

Mutual Fund Taxation FY 2018-19

The rate of taxation is as below for the current FY.

Also, the current DDT rates for Mutual Funds is explained in below chart.

Mutual Fund Taxation FY 2018-19 - DDT or Dividend Distribution Tax

Risk Vs Return of Debt Funds -After SEBI Categorization

In this below image, I will try to show the risk and return of each fund for your better understanding.

Types of Debt Funds in India -After SEBI Categorization Risks and Returns

Do remember that Dynamic Bond Funds have a mandate to change their portfolio based on interest rate movements. But still I consider them riskier and that is the reason I put them above Long Duration Bonds. However, at a certain point of time, they may be less risky when they changed their view and holding low duration bonds. Hence, you have to cross check before deciding into Dynamic Bond Funds.

I have excluded the debt fund types like issuer based bonds like (Corporate Bonds Funds or Credit Risk Bonds Funds) as we are unaware of the modified duration, average maturity and Macaulay Duration. Hence, you have to take the call after reviewing the portfolio details of such funds.

Which types of Debt Funds to invest after SEBI Categorization?

You noticed that debt funds are categorized into 16 categories. In such a situation, which is BEST SUITABLE TO ME? As usual, use the simple logic of investing in debt funds. Why do you look for debt funds? The priority is safety, diversification and some more expectation from traditional debt instruments like Bank FDs or RDs.

Hence, if you have these three concerns, then stick to Liquid Funds or Ultra Short Term Debt Funds. However, you are creating a debt portfolio by playing with interest rate risk and credit risk, then according to your risk appetite, you can include other types of debt funds like Dynamic Bond Funds, Gilt Funds, long duration Gilt Funds, corporate bond funds or credit risk funds.

While you are creating such a debt portfolio of various categories of debt funds, do analyze the above risk measuring points of debt funds before jump into investment.

However, I personally satisfied with Liquid Funds and Ultra Short Term Debt Funds.

Refer our other posts related to debt funds:-

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