We often think that debt funds are safe and the returns are almost certain. While that is true in most cases, there is an element of interest rate risk, price risk and credit rating risk that investors have to always understand. In India there are many popular dent funds, though, investment in them has been made less attractive in the Union Budget 2014, because of certain changes. We take a look at six important debt funds and when you should invest in the same.

Fixed maturity plans

Fixed maturity plans (FMPs) invest in instruments that have a fixed duration. For example, they may invest in a certificate of deposit with one year maturity, which yields an interest rate of 9.2 per cent. The problem with FMPs is that if the interest rate cycle climbs, they tend to lose money, because they have already invested for a specified period.

Liquid funds

Liquid Funds invest the money in instruments with a very short duration. The interest rate risks arising in the case of liquid funds is minimal given the fact that they invest for a period of around 91-days. If a Liquid fund invests in highly rated instruments, the chances of risk from the Liquid funds is almost zero.

Ultra short term funds

Ultra short term funds invest in securities with a maturity period of more than 91-days, but, probably lesser than six months. They too may not face interest rate risk, though, credit and risk of default remains.

Income funds

Income funds are debt mutual funds that invest in a a number of instruments including government securities, certificates of deposits, corporate bonds, fixed deposits and money market instruments. Since they invest for the longer term, the chances of interest rate and credit risk is very high.

Gilt funds

Gilt funds are funds that invest in Government securities and are mostly for the conservative set of investors. These funds tend to benefit when there is a hike in short term policy rates. They may tend to offer lower returns than other peers, but they are the most secure of the funds around. Invest if you are looking at safety more than returns.

Conclusion

Which instrument one should invest in, would depend on the risk appetite of the individual. Broadly speaking the interest rate between all of the above would not vary more than a couple of per centage points.

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