What is Debt fund, Hybrid fund, types of Debt fund

What is Debt fund, What is Hybrid fund, Types of Debt fund

In the prevous article we have discussed about the different types of mutual fund, and we have already explained the subtypes of Equity fund , if you have not read it then go the article  Types of mututal fund in India. Now in this article we will explain the two remaining types Debt Fund and Hybrid Fund.

What is Debt Fund

Debt fund, basically invests in debt instrument like Debentures, Bond and certificate of deposit etc. By these instruments government  and companies borrow the money from people and return with interest. Because these are government operated funds that’s why there is low risk and also low return on these fund.

There are four types of Debt fund

  • Gilt Fund
  • Junk Bond Schemes
  • Fixed maturity Plans
  • Liquid Schemes

Those fund which only invest in Government securities are known as Gilt funds, government securities is issued by government that’s why default risk is zero. you can invest in for short term and for long term both.

As the name suggest junk means wastage, so these fund have high risk and they also give high interest rate, those debt funds which invest in junk bond are known as junk bond schemes.

Next type of debt fund is fixed maturity plans, these are similar to bank FD  its has a fixed maturity date, these types of funds generally invest in certificate of deposit, commercial papers and corporate bonds etc. Their return are generally higher than bank Fixed Deposit.

The next type of debt fund is Liquid Fund , these types of fund invest in money market instrument. In money market by financial instrument companies borrow money from investors for a short time.

They invest for a short term money market instrument like certificate of deposits, treasury bills, commercial papers, term deposits etc. Liquid funds have low risk and they are low volatile they generally give good returns than bank savings. therefor for a short term liquid fund is the best option for investment, and you have the option that you can exit from it anytime.

Hybrid Fund

Hybrid funds generally invest in both the assets classes Equity and Debt. Threre are three types of Hybrid Fund.

  • Monthly Income Plan
  • Balanced Fund
  • Arbitrage Fund

In MIP (Monthly Income Plan) 60-90% is invested in debt and the remaining part is invested in Equity, that’s why there is low risk in it compare to equity fund.

Next type if Balanced fund, as the name suggest balanced but it doen’t mean that they invest 50%-50% in both the assets, they invest 65% to 85% in Equities and remaining in debt. Here due to high investment in equities that’s why its return ration is higher but the risk is also higher than MIP.

Next fund is Arbitrage fund, arbitrage is a method in which if a share price in cash and derivative market is different then arbitrage fund take advantage of this differential by buying stock in the cash market and simultaneously selling a contract for the same number of shares on the futures market if the market is bullish the stock.  In arbitrage fund 65% is invested in equity, in this fund there is low risk and you can expect the return of 6-10% , for taxation arbitrage fund is considered as equity fund.

These all types are based on assets class,  on the basis of mutual fund structure there are two types of mutual fund.

Open Ended Fund

Close Ended Fund

When you buy a mutual fund then either it will be an open ended fund or close ended fund,  in open ended fund there is no restriction you can buy or sell any time, on the other hand close ended fund are different you can only buy it when their NFO comes, and can sell after completion of maturity. These funds also trades on exchange so if you want to buy or sell it then you can go there but due to very low liquidity its difficult to buying and selling it.

After these their are some other types based on fund management that is Actively managed fund and Passively managed fund.

Some other funds are also available like International funds , Real Estate fund, Gold funds, Exchange Traded Fund etc we will cover them in some other topic.

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