Think Debt is a joint initiative between ICICI Prudential MF and Wealth Forum, which aims at sharing new thoughts and paradigms to help all of us make deeper inroads into the large pool of conservative retail savings.

Educating the retail saver on debt funds is the best way to make a beginning in this direction. And that is exactly what Team ICICI Prudential MF has done with this 4 part education series, which offers a beginners guide to debt funds in a simple Q&A format. Do share this article series with all your clients and prospects, and help build their conviction in debt funds as an integral part of their investment portfolios.

So, which mutual fund schemes invest in debt? Well, the following schemes are pure debt schemes (that is, they invest only in debt securities):

1. Money Market Funds: These funds invest in very short term debt securities and are suitable for parking your money which you have kept aside for your emergency needs.

2. Flexible Income Funds: Also known as floating rate funds, these invest in debt securities that do not have a fixed coupon rate (that is, interest rate payable on the face value of the security). The rate varies periodically with the movement of a specified benchmark interest rate. If you prefer lesser interest rate risk and are satisfied with the current interest rates prevailing in the market, these funds are suitable for you.

3. Income Funds: These funds invest in a wide variety of debt securities like bonds, debentures, etc. issued by government, public sector and private companies. They are more diversified and tend to invest in various debt securities depending on the prevailing market conditions. If you plan to stay invested for a longer period (say, more than 3 years), these funds are suitable for you.

4. Gilt Funds: These funds invest in government securities such as treasury bills, government bonds, etc. If you prefer not to take any credit risk, these funds are suitable for you.

5. Bond Funds: These funds invest only in fixed income securities. There are many types of bond funds depending on the duration of the debt securities, the credit quality and interest rate. You may pick one to suit your need.

6. Liquid Funds: These funds invest in debt securities with duration of up to 90 days. These are suitable for very short term investments of a few days or weeks. Instead of keeping your money in your savings account, you can invest in these funds.

7. Short term Debt Funds: These funds invest in bonds with relatively shorter duration (the duration of debt securities invested by these funds is longer than those invested by liquid funds and money market funds, but shorter than that of income funds). If you plan to stay invested for a few months, these funds are suitable for you.

8. Fixed Maturity Plans (FMPs): These close-ended funds invest in debt securities with a fixed duration. The duration of the debt securities invested is in line with the duration of the fund. For instance, if the FMP is for 1 year, it can invest in debt securities of one-year duration.

9. Dynamic Bond Funds: These funds judge the expected change in interest rates and accordingly invest in debt securities. For instance, if they expect interest rates to fall, they invest in debt securities of longer investment duration, and vice versa. If you do not want to predict interest rate movements, this fund is suitable for you.

The following schemes are debt oriented hybrid schemes (that is, they invest a major part of their funds in debt):

1. Multiple Yield Funds: These funds are debt funds but with a dash of equities, typically in the range of 10 to 30%. These are for you if you are a conservative investor preferring returns along with potential capital appreciation.

2. Capital Protection Oriented Funds: These funds are basically debt funds with a small amount invested in equity. The portfolio structure of such schemes is that the capital amount is oriented towards protection of capital. The equity investment portion aims to provide capital appreciation. If you don't like taking risks, this fund is suitable for you.

3. Monthly Income Plans: These funds invest about 75 to 95 percent in debt securities and the balance in equity. Though they attempt to offer regular income, there is no guarantee of any monthly income. If you prefer a combination of regular income and growth, these funds are suitable for you.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This article should not be considered as 'investment advice'. We request the Reader to make informed investment decisions and consult their financial advisors to determine the financial implications with respect to investing in Mutual Funds.

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