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:-

39 thoughts on “Types of Debt Funds in India -After SEBI Categorization”

  1. Sir….generally every financial expert says that we should have long term time horizon for mutual funds. The investments should be tie up with a long term goal. I agree on that.

    I want to ask that every year there are new schemes launche in the market. The fund that was Number 1 a few years back has changed to may be number 4 or 5 after six, seven years.

    So how should we as a retail investor evaluate the need to change the mutual funds?

    If we regularly review the funds performance and they are giving standard MF returns between 12% to 16% then should we continue in the existing funds? Or should we switch to new schemes that are giving similar returns.

    Need to understand this login from someone expert like you. thanks.

    1. Dear Chris,
      All Mutual Funds are not meant for long term. Using like Liquid Funds, you can park your short term required money also. Now, regarding fund performance, never run behind star ratings. Once you select the fund, then give it enough time (1-2 years) to perform. If the fund is consistently underperforming (say like 1-2 yrs), then think of changing the fund. Never take any knee-jerk reactions.

  2. Dear Sir,

    I want to invest in ultra short debit fund. My risk limit is very low.

    I want to start SIP for 10,000 every month. My goal is for 5 to 7 years and can go beyond that.

    I am reading a lot on different websites and youtube channels and finalized this scheme – Franklin India Ultra-Short Bond Fund – Super Institutional Plan – Direct Plan (G)

    I also read different comments in your blog and you said yes to some readers who are interested in this MF.

    My age is 36 now and goal is to generate corpus in next few years.

    I want to stay away from any large cap equity fund. Please advice on this fund. Thank you so so much.

  3. Hi Sir,

    Could you please clarify when does the taxation gets applied to Debt Mutual funds?
    1. Is it applied on the capital gains only after redemption?
    2. Or TDS is calculated and deducted for every FY similar to Bank FDs?

  4. Hi Basu,
    I am investing (SIP) in below funds since 3 years
    1) ICICI Pru Focussed Bluechip Fund
    2) HDFC Balanced Fund

    In regards with recent merger of “HDFC Balanced Fund” into “HDFC Hybrid Equity Fund”. Should I continue with this fund?

  5. Dear Sir,

    I am working as a professor with monthly salary of 30,000. I am investing 5,000 in RD. I now want to add 5,000 in Mutual funds.

    I am researching that to invest in mid cap fund. Can you please suggest if I should buy “Aditya Birla Sun Life Pure Value Fund (G)”.

    I am single don’t have any other liabilities. My goal is to buy a car and need 5 lakh in next 4 years.

    Thanks for the help.

          1. No Sir, only 5,000 in RD so now I want to invest in mutual funds. I was reading that mid cap funds are good. Can you please please help me sir? thank you

            1. Dear Pooja,
              Don’t touch equity if your time horizon is less than 5 years. Mid Cap Funds are good but for whom (I mean time horizon of the investor) and what asset allocation one has to follow? These questions not answered by that information where you READ.

              1. Yes, very clever Sir.

                What funds would you recommend based on these inputs from end. Can you please answer this last question 🙂 🙂 Thank you and bless you.

                  1. Hello Basu,
                    Could you please provide your select Liquid, Ultra Short Term Debt, Short Term Debt (if it is not a too much trouble for you).

                    Many thanks in advance !!

                  2. Thank you sir. What about “Franklin India Ultra Short Bond Fund”.

                    I have done some research and short listed it. Please advice.

  6. Dear Basu
    I am investing in Franklin India Low duration debt fund since 3 years, as my debt part of investment and insight from your blog. In a monthly statement it is showing around 8% return, should I continue…
    If its ok to continue I may further continue for 7-8 years more Or till I retire.
    I am 48yr old.
    Also TATA balanced is not doing that well off late…..
    Should I continue or shift to HDFC balanced ( from last 4 yrs. doing SIP)
    Kindly advice,

      1. Thank you very much.
        Can we keep invested in Ultra short term debt fund for longer duration say 10-12 years? Kindly bear with my dumbness in this regard!!!
        How to switch in the same fund house(Franklin) and between different fund houses(tata to HDFC).
        Thanks again.

        1. Dear Saleem,
          Yes, why NOT? Whether you switch fund within a same AMC or with different AMC, the SWITCH from old fund is considered as redemption and in new fund is considered as fresh investment.

      2. I did change to ultra short from low duration Franklin fund also redeemed Tata balance fund of 5000 SIP.
        Planning to put in Hdfc’s balanced 2500 and 2500 in Franklin Equity fund(previously Prima plus).My horizon is more than 10yrs and I am in to this fund from almost 2 yrs.
        Kindly advice if this fund is ok.

  7. Great Post Basavaraj , I was looking for this post on new sebi cateforisation.

    Have one query here , SEBI has done away with Short Term GILT fund not exceeding between 1-3 year duration these provides zero credit risk and decent returns and less susceptible to interest rate risk , Is there any other GILT fund one can invest for investor looking for highest quality credit with shortest possible duration to minimise interest rate risk ?

    1. Dear Austin,
      You have to look in Gilt Funds average maturity and modified duration to identify. However, SEBI not specified in this category of funds that what should be the duration. By constant monitoring, you can invest in Gilt Fund (but not Gilt Fund with 10 years constant duration funds). You can also check Banking and PSU Debt Funds also if you are looking for credit quality (but check duration).

      1. Austin Joseph

        Thank You Sir , I saw you write up on freefincal as fee only advisor journey , I wish you all success in this journey , God Bless

  8. Great blog, Basu sir! Keep it up.

    Which fund would you recommend to someone in the highest tax slab to park short term liquidity for 3-6 months?

    1. debt fund growth
    2. debt fund dividend
    3. arbitrage fund growth
    4. arbitrage fund dividend

  9. Hi Basu sir,
    Great article really helpful. I was not even aware that so many debt funds are there. Thanks for the information

  10. Rajinder Gautam

    I am confused and need your expert advice for naming few funds to invest , safety , growth and return point of view. I am 67 yers and think that I can survive till 80 and remain invested till 75(1-8 years).
    I will b glad to have 8-10% tax free returns in addition growth .
    I will b more happy with tax free minimum 8%pa on monthly basis by investing in some plans where principal amount do not depreciate. I found HDFC Prudence but there my principal has minutely started eroding.
    Tell me some SWP where I get monthly, pension type , without erosion of principal (which my children will enjoy)
    In such fund I m ready to invest LS 2-5 lacs with top up of 1 lac every year and get monthly pension by way of SWP , without depreciation / erosion of principal

    1. Dear Rajinder,
      There is no such plan in Mutual Funds which will give you constant stream of income. SWP may be best when for that particular SWP if the return matches your SWP amount. If fund generates less than that, then SWP will erode your principal also. Also, I can’t guide you with mere few lines of sharing.

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