Debt funds are mutual funds schemes that allocate your assets to debt instruments such as government bonds, corporate bonds, commercial papers, and T-bills.

These debt instruments are traded in the market like stocks. Their price goes up and down based on the interest rates and demand. 

In recent years, debt funds are gaining popularity among investors as they offer decent returns with lower risk than equity schemes. 

Debt funds come in various types depending on the investment horizon and risk factor. 

Let’s see how many different types of debt funds are there

Common Types of Debt Funds

Debt funds have three primary categories based on credit profile, duration, and underlying assets.

Type 1: Duration Profile

These debt funds primarily focus on the maturity duration of the underlying investment. 

1. Overnight Funds

Overnight funds invest in debt instruments with a maturity of 1 day. This bond offers high liquidity with moderate returns. Overnight funds are suitable for investors willing to invest in debt schemes for a very short period of time.

2. Liquid Funds

Liquid fund schemes invest in debt securities with only up to 91 days of maturity period. These funds are suitable for investors seeking steady returns by investing only for a few months. 

3. Ultra-Short Duration Funds

Ultra-Short duration funds have a 3-month maturity period. These funds may offer superior yield (rate of return) with low risk when held for more than 3 months. 

4. Low Duration Debt Funds

Low Duration debt funds expect investors to have an investment horizon of at least 6-12 months. These funds may deliver higher returns than ultra-short duration funds but with moderate risk. To boost the yield, these funds may allocate some assets to bonds with lower credit rank.

5. Money Market Funds

Money market funds allocate your assets to debt instruments having a maturity period of upto 1 year like commercial papers or treasury bills. The interest income may boost returns on these funds.

6. Short Duration Funds

Short-duration funds expect you to have 1-3 years of an investment horizon. These schemes invest in both short and long-term debt instruments with different credit ratings. You may receive higher returns than liquid or ultra-short funds but with some fluctuations in the prices. Investors with a slight risk appetite can consider these funds.

7. Medium Duration

These funds invest in debt and money market instruments with a maturity period of 3-4 years.

8. Medium to Long Duration

These funds have a maturity horizon of 4-7 years. You may come across high-interest rate risk but with decent returns.

9. Long Duration

These funds have a 7+ years maturity period. Long-duration schemes might be riskier than any of the above schemes, yet less risky than equity schemes. 

    10. Dynamic Funds

Dynamic funds have no threshold or restrictions on the security type or maturity period of the investment. These schemes are flexible and dynamically change investments depending on the interest rate cycle. 

Type 2: Underlying Assets

These debt funds focus mainly on the specific investment profile of the underlying asset.

1. Corporate Bond Funds

These schemes invest at least 80% of total assets in AA+ or higher corporate bonds. Investors with a low-risk appetite seeking regular income and safety can consider investing in corporate bond funds.

2. Floater Funds

Floater funds invest at least 65% of total assets in floating rate instruments. As the coupons (annual fixed income security) on the floating rate get periodically reset, you can take advantage of low interest-rate risk. 

3. Banking and PSU Funds

These funds invest at least 80% of total assets into debt securities issued by banks, PSUs, and public financial institutions. These funds offer safety, decent yield, and liquidity. 

Type 3: Credit Profile

These debt funds invest based on the underlying credit risk profile. 

1. Credit Risk Funds

Credit risk funds allocate at least 65% of total assets to AA (or lower) rated corporate bonds. There’s some risk but yields might be superior. If you have an aggressive risk profile and are looking for high risk-high return, these funds are suitable for your portfolio.

2. Gilt Funds

Gilt funds invest at least 80% of total funds in government securities of varying maturity periods. You may come across a high-interest rate risk but a low default risk. In a falling interest rate scenario, Gilt funds may be an ideal investment option.

On the other hand, Gilt funds with a 10-year constant duration, unlike regular Gilt funds, invest at least 80% of total funds in government securities with a constant duration of 10 years. Here, interest rate risk is stable due to the constant duration. 

Conclusion

Among all the different types of debt funds, it could be confusing to choose one. It’s important to match the current yield to maturity, modified duration, and credit risk of the debt fund to your financial goals, risk profile, and investment horizon.

It’s best to get an expert to help you find which debt fund to invest in. Before letting a financial advisor evaluate your profile, here are some things you need to know.

 

Contact us to get a free portfolio analysis and know about all possible investment options suitable for you.

Index mutual funds are the type of passive funds that follow a certain index/benchmark to plan investments. The fund managers follow the index such as Nifty 50 or Sensex to invest money in the exact proportion. The returns on these funds are aligned with the underlying index. 

These funds are safer than equity mutual funds, have lower expense ratios, deliver decent returns, and don’t need active attention. Investors who are seeking diverse portfolios with low to moderate risk can take advantage of the index funds.  

Let’s shed more light on the index funds.  

What Is The Investment Regime For Index Mutual Funds? 

Index mutual funds in India either follow the Nifty 50 or Sensex as the investment benchmark. 

Nifty 50 is the benchmark index that represents the top 50 companies listed on the National Stock Exchange. Sensex represents the top 30 companies listed on the Bombay Stock Exchange. These companies could be of any type and sector.  

Fund houses allocate money to these top companies on Nifty or Sensex. The performance of the index funds completely depends on the performance of the underlying index. 

It is always advised to hold these funds for a longer horizon to receive superior returns.

Top 5 Advantages of Index Mutual Funds

1. Diverse Portfolio

Index funds are a combination of companies from various sectors. Once you invest in index funds, you invest in all these companies without assessing them individually. 

Not only does it save your time but also diversifies your investment portfolio. 

2. No Active Management 

Index funds are passive investments. Neither the fund manager nor you have to actively reallocate the funds to balance risk and returns. 

Fund managers simply follow the underlying index benchmark and keep the investment as it is.  No headache of active management.

3. Low Expense Ratio 

Fund houses do not need to invest time and resources into analyzing the performance of the fund. They only have to reflect the benchmark into the investment allocation. To do so, they charge a very minimal expense ratio. 

4. No Fund Allocation Bias 

How much funds to allocate to a particular stock is always a question with mutual funds. Fund managers have to analyze the market to decide the percentage of funds to allocate to each company. 

In index funds, the allocation bias doesn’t exist as the benchmark defines it all. There is less chance of human error as these funds are regulated with the index.

5. Risk Transparency 

The fluctuations in the returns from index funds depend on the performance of the top companies from the underlying index.  

Since Nifty and Sensex constantly track the performance of the companies, the risk can be lower. You have complete transparency about the risk factor.

5 Things To Consider Before Investing In Index Funds

1. Returns on Index Funds 

As index funds are passively managed funds, they are less affected by market volatility. You will be able to earn decent returns even when the market is not at its peak.  However, you may want to consider investing in some active funds to balance the returns. 

2. Risk

Index funds are less riskier than equity funds. Market volatility doesn’t actively impact index funds. You may still get good returns compared to other actively managed investments.

3. Tracking Error and Tracking Difference 

Tracking difference is the difference between the gains of the index funds vs the underlying index. If it’s positive, the funds have outperformed the underlying index. Tracking error is the standard deviation of the tracking difference over a period of time. Fund houses make decisions based on tracking errors with respect to the underlying index. It can have either a positive or a negative impact on the returns.

4. Investment Horizon 

Index funds deliver better returns in a long term. If you keep your investment horizon to 5-7 years, you are most likely to earn better returns. The rule applies to all mutual funds. 

5. Index Category 

You may want to make yourself familiar with the index category. Index funds either follow the Nifty 50 or Sensex with variable or equal weightage. You can choose the index fund category based on your risk tolerance and portfolio balance. 

Taxation In Index Funds

The capital gains earned via Index funds are similar to the equity mutual funds. It depends on the duration of the investment. 

If you redeem your investment before 12 months (Short term capital gains), you will have to pay a 20% tax. Investments held for more than a year (Long Term Capital Gains) above 1.25 Lakhs are taxed at 12.5%.

Who Should Invest in Index Funds?

Index funds are not as risky as equity funds or stocks. So any new investor can start an investment portfolio with index funds. These funds are suitable for low-risk appetite investors. 

However, index funds are also great to balance the risk. So if you have active funds which are prone to risk, index funds can balance your risk profile.  

Always good to have a blend of active and passive funds in your portfolio.

Conclusion

The top two advantages of index funds are: these funds are passively managed and possess comparatively lower risk. If you are looking for a long-term, risk-balancing investment, index funds can chime in on your portfolio.

You may want to get familiar with the index categories before choosing a suitable index fund. Or you can always seek help from our expert advisors. 

We recommend evaluating your portfolio before deciding on the right index fund for you. Write to us anytime with your investment goals. Get a complimentary portfolio analysis and start building wealth.

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What are Exchange Traded Funds and how are they different from Index Funds?

FD vs Debt Funds: Where to invest your money?

The fixed deposit has been a popular investment option in Indian households for years. If you have a lumpsum amount, your grandparents and parents will suggest investing in FD.

Debt funds, on the other hand, started becoming popular in the past few years. Many investors began preferring debt funds over FD for several reasons. 

However, the changes in the debt funds taxation from April 2023 had thrown everyone off guard. Investors will no longer benefit from indexation on Long-Term capital gains. Both Long and Short-term capital gains will be taxed as per the investor’s tax slab.

So…

Are debt funds still better than FD? The answer is YES! Especially after the new tax regime as per Budget 2025.

Let’s find out how.

FD Vs Debt Funds

A fixed deposit is a financial instrument where you can invest a lumpsum amount and earn returns at fixed interest rates. Usually, banks have predefined interest rates and tenure.

Debt funds are a type of mutual fund in which fund houses allocate your assets into fixed-income securities such as government bonds, corporate bonds, commercial papers, and T-bills. 

Top 4 Differences Between Debt Funds and Fixed Deposit

1. Risk

Fixed Deposit:

FD is known to be the safest investment option. However, in rare cases, if a bank goes bankrupt, it might default on your FD. According to recent RBI rules, even nationalized banks only offer up to INR. 5 lakh of FD default insurance per account. You may not receive the principal amount or interest above INR. 5 Lakh if the bank defaults on your FD.

Debt Funds:

The risk on debt funds depends on the features of the scheme you invest in. There are 15 different types of debt funds, each with variable risk-reward intensity. 

Debt funds primarily come across two types of risks:

1. Interest Rate Risk- Similar to stocks, bonds are also traded in the market. Their price goes up and down based on the interest rate and demand. If the interest rate goes up, the price will decrease and vice versa. These fluctuations can either drop or boost the returns. You can manage the interest rate risk by holding your investment until maturity or by buying short or long-duration funds based on whether the interest rates are going up or down. 

2. Credit Risk- Say, for instance, you loan INR. 1000 to your friend to start a business. The friend promises to return your money with interest. But if his/her business doesn’t do well, then your friend might not be able to honor the commitment. A similar thing can happen in debt funds. Borrowers might not be able to deliver expected commitments, which causes credit risk. You can avoid it by evaluating the ratings of bonds through credit rating agencies like CRISIL. Different credit rating agencies may have different rating parameters. But the most common ratings are AAA, AA, A, BBB, BB, B, C, D, and SD.

AAA and AA are the safest to invest in. ‘A’ may have a slight risk associated with it. All the further ratings have moderate to high risk. Other than credit risk funds, most debt funds maintain credit quality by investing in high-credit quality bonds. 

2. Returns

A fixed deposit delivers returns based on the fixed interest rate offered by the bank. You will be guaranteed to earn a fixed interest rate. But there’s no possibility of earning anything beyond that. At the time of maturity, if you decide to extend the FD, it will get reinvested at the current interest rate, which could be lower/higher than the previous one. 

Debt funds may not guarantee how much returns you’ll earn. But they can deliver superior returns than the FDs, especially in a falling interest rate scenario where bond prices shoot up, offering additional returns.  

3. Liquidity

Both FD and Debt Funds do not have any lock-in period. You can withdraw money whenever you please. However, banks charge a penalty for premature withdrawal.

Debt funds may or may not have an exit load. It’s the fee charged by fund houses if you redeem funds before a certain period of time. You can check the exit load associated with the debt fund before investing in it. 

Taxation on FD vs Debt Funds

Let’s address the elephant in the room. The TAX.

1. Tax on Accrued Interest on FD

You have to pay tax on accrued interest on FD every year even before you receive it. 

Let’s say, you have created a cumulative FD. The yearly interest that you earn will be reinvested in the same FD to benefit from the power of compounding.

Now, as unfair as it may sound, the reinvested interest will be treated as income earned. You have to pay tax as per your tax slab on the interest you technically haven’t received in your account.

2. Tax On Capital Gains Earned on Debt Funds

Unlike FDs, Debt funds do not have the concept of tax on accrued interest. You only have to pay tax on capital gains when you redeem your investment. 

Before April 2023, all Debt funds used to have different tax rules for Short and Long Term Capital Gains. Indexation benefit on LTCG was the key feature of debt funds taxation.

From April 2023, the taxation rule has changed.

As per the new rule:

Both Long and Short-term capital gains will be taxed as per the investor’s tax slab without any indexation benefit. 

Unless…

The fund has more than 35% exposure to equity.

Explore the latest tax regulations across all Mutual Fund Categories.

Now, as per the new tax regime proposed in budget 2025- if you have invested in debt funds after April 2023, capital gains from debt funds can be used to avail rebate up to INR. 60,000. This is more beneficial for taxpayers with gross income (including capital gains earned from debt funds) of INR. 12,00,000.

Here’s how-

Gross Income	Tax As Per New Tax Regime FY25-26
0 to 4L	NA
4L to 8L	20,000
8L to 12L	40,000
Total Payable Tax	60,000
Rebate Under Section 87A	60,000
Net Payable Tax	0

Even if your gross income exceeds INR. 12,00,000, your tax liability will be lower with the new tax regime.

Coming back to our question.

Are Debt Funds Still Better Than FDs?

Of course! Debt funds are still investable for various reasons. 

You can invest in a specific type of debt fund that aligns with your goals. It offers a safety net against equity volatility.

Sure, taxation may no longer be as efficient as it used to be without the indexation benefit. But that’s not the only parameter to judge debt funds. They have a lot more to offer than FDs.

Investors willing to slightly increase their risk appetite to generate post-tax returns similar to debt fund schemes (pre-31st Mar 2023 tax era) can explore hybrid funds. For example, Equity Savings Funds, Hybrid Debt Funds, Multi-Asset Funds, and Various other Asset Allocation Funds.  

FD vs Debt Fund: Where Would You Invest?

Both FD and Debt Funds offer various benefits to strengthen your financial goals. If your focus is on security and guaranteed returns, Fixed Deposits would be a better fit for you. 

Otherwise, debt funds have the potential to offer superior returns without changing your risk profile and also help with portfolio balancing. 

If you are struggling to decide which debt funds to choose, give us a call. VNN Wealth advisors will walk you through all types of debt funds and help you make a decision.

The Exchange Traded Funds are a type of mutual fund with stock-like trading benefits. ETFs follow a benchmark index such as Nifty 50 or Sensex to invest and match the returns.

The returns on these funds change as per the changes in the underlying index. These funds offer the best of both mutual funds and stocks. 

ETFs are nearly similar to Index mutual funds. The only difference is, ETFs are traded in the market and you can access these funds in your Demat account.

What is The Investment Regime of Exchange Traded Funds?

According to SEBI guidelines, fund houses allocate at least 95% of total assets into securities listed on the underlying index. 

The investment strategy may change based on the type of ETF.  

Index ETF- Follows a benchmark index (Nifty 50 or Sensex) to reflect similar returns.

Gold ETF- Investment in Gold without owning physical gold.

Fixed Income ETF- Invest in fixed-income securities listed on the fixed-income indices. For example- Nifty 1D TRI, Nifty 8-13 years.

Sector ETF- Follow specific sector indices to invest and reflect similar returns. For example- Nifty PSU bank, and Nifty Private bank.

International ETF- Invest in international indices such as NASDAQ 100.

Top 4 Benefits of Investing in ETFs

1. Wider Exposure and Diversification 

ETF offers diversification via buckets of various investment securities across different sectors and market segments. 

Anything that can be traded on the market and has flexible liquidity can be a part of ETF.  

You can even opt for international ETFs to explore foreign financial instruments. Instead of investing in a single stock, trading multiple securities via ETF can offer better returns.

2. Low Cost 

Even though traded on the market, ETFs are passive funds. ETFs have a lower expense ratio than actively managed funds and other passive investment instruments.

It enables you to have low-cost investments with decent returns.

3. Trading Opportunity with High Liquidity

The Exchange traded funds allow you to trade the whole bucket of funds on the market. The unit prices of underlying securities go up and down throughout the day over the market. 

As these funds are in your Demat account, you can quickly buy/sell more units at your preferred price. There is no lock-in period for the ETF.

4. Transparency 

Fund houses disclose the holding portfolio of ETFs to the investors on daily basis. Some ETFs send monthly or quarterly holding reports. 

And as these funds follow the specific benchmark index, all the underlying assets and corresponding holdings are known to the investors.

Things to Consider Before Investing In Exchange Traded Funds

1. Your Investment Portfolio 

First thing first, before investing in ETF or any mutual funds, analyze your portfolio. Plan your investment based on your risk profile and investment goals. If your profile still has a scope to diversify, ETF can become a part of your investments. 

2. Risk 

The Exchange traded funds follow the benchmark index and are traded on the market. Here, you have the risk of market volatility. 

If the index drops down, your returns will also drop down. Vice versa is possible too, so you may have the opportunity to bag superior returns.

Some ETFs may have complex investment securities, which could be difficult to keep track of. Make sure you understand all the features of the selected fund. You can always seek help from wealth advisors.

3. Underlying Index 

There are different types of ETFs available for investors to choose from. Gold ETF, sectoral ETF, and even International ETFs.

We would recommend understanding what index benchmark would benefit your portfolio the most. You have the option to follow a generalized underlying index or an industry-specific index to invest in these funds. 

4. Tracking Error 

Tracking error is the standard deviation of the difference between the returns on ETF and returns on the underlying index. 

If the tracking error is positive, that means the funds have outperformed the underlying index. If it’s negative, that means you will gain fewer returns on funds compared to the underlying index. 

Knowing this, you may want to consider funds with lower tracking errors.

Taxation on Exchange Traded Funds 

Index ETFs and Gold/International ETFs have different taxation structures.  

Index ETF Taxation- Index ETFs are considered equity-based investments. The tax on capital gains will be similar to equity mutual funds. 

• Short Term Capital Gains (Investments held for less than 12 months) come under 20% taxation. 
• Long Term Capital Gains (Investments held for more than 12 months) above 1.25 lakh will come under 12.5% taxation with indexation benefits. 

Gold/International ETF Taxation-  

• Both short term and long term capital gains will be taxed as per your tax slab.

Who Should Invest In Exchange Traded Funds?

ETFs are not meant for new investors. Since these funds contain different types of financial instruments, it could be quite complex to understand them. Instead, new investors can go with Index funds. 

Investors who have been investing in the stock market for years can consider ETFs for diversity and the ability to trade. These funds offer high liquidity with no lock-in period. ETFs are also suitable for investors who are interested in International securities.

Conclusion

Funds that follow a benchmark to reflect returns are fairly transparent and moderately safe. Investors who want to have mutual fund security with trading benefits can go with ETF.  

You can access ETF investment through your Demat account and buy/sell at your convenience. This opportunity opens up high liquidity and a flexible investment horizon. 

New investors can consider ETFs with generalized indices. Otherwise, there are ETFs that follow sector-specific indices. 

For investors who don’t want trading features, there are always index funds.

Planning your next mutual fund investment? We, at VNN Wealth, offer portfolio analysis along with a suitable investment plan. Get in touch with us to explore various investment avenues.

Find more mutual fund insights here.

Flexi cap mutual funds are a new category of equity mutual funds with flexible asset allocation across the market capitalization. These mutual funds give investors the freedom to invest in small, mid, and large-cap stocks without any restrictions.

How is it different from Multi-cap funds? Multi-cap funds have to compulsorily invest at least 25% of assets each in small, mid, and large-cap stocks. Flexi-cap funds have no such restrictions. Fund managers can dynamically allocate assets to growth-positive companies to maximize returns.

Sounds interesting? Let’s find out more about Flexi Cap mutual funds.

What is the Investment Regime in Flexi-Cap Mutual Funds?

SEBI launched the Flexi-cap scheme in 2020 to offer investment flexibility and dynamic asset allocation.

Fund managers have to invest at least 65% of total assets into equities across market capitalization. They can decide the allocation based on their analysis and expertise to lower the risk and boost profits.

Top 5 Advantages of Flexi-cap Mutual Funds

1. Freedom of Investment

Fund managers can invest the principal amount across a wide spectrum of markets. There is no limitation or rules on asset allocation. Flexi-cap funds are required to invest at least 65% into equities. But they have the freedom to distribute that 65% (or more) into any market cap. 

2. Diverse Portfolio

Flexi-cap schemes are a blend of small, mid, and large-cap companies. They can create a diverse portfolio by allocating assets to different sizes and types of companies. 

3. Balanced Risk

Flexi-cap funds deliver favorable returns with balanced risk. While you can explore small-cap funds for higher returns, large-cap funds can safeguard your investment. Mid-caps are moderately risky with decent returns. They collectively create a perfect balance between risk and returns.

4. Shift Investment

Fund Managers can anytime shift assets between small, mid, or large-cap based on market volatility. They can tilt the funds completely towards a specific market capitalization segment or keep it diverse. 

5. Surpassing Inflation

Flexi-cap funds have the potential to defeat inflation in the long run. As you have a dynamic mixture of various market capitalizations, inflation won’t affect your returns as much.

Things to Consider Before Investing in Flexi-Cap Funds

1. Investment Objectives

You must check if their investment goals align with Flexi-cap funds. Even though these funds have various benefits, that doesn’t mean you should invest blindly. Examine the fund’s features, fund manager’s performance, risk, and returns before investing in any mutual funds.

2. Risk

Flexi-cap funds balance the risk with diverse investments but are not risk-free. You may encounter high risk if the fund has allocated the majority of your assets to small-cap companies. Usually, fund houses have an in-house model to periodically balance Flexi-cap funds to minimize risk and maximize returns. Make sure your risk profile has a scope to welcome Flexi-cap funds.

3. Fund Houses and Managers

It is very crucial to know the in-house policies and strategies of fund houses in the case of Flexi-cap funds. The returns you will earn depend on how well fund managers distribute your assets. 

4. Expense Ratio and Exit Load

Fund houses charge a small amount of fee to handle your funds in the form of an expense ratio. Compare the expense ratio of various Flexi-cap funds with respect to returns before investing in them. Exit load is a fee charged at the time of fund redemption. If you hold the investment for a certain period of time, you might not need to pay an exit load. Check the exit load policy of fund houses beforehand.

Tax Implications

Taxation of Flexi-Cap funds is the same as any other equity mutual fund. You will have to pay a 20% tax on Short Term Capital Gains (Investments redeemed before 12 months). 

Long Term Capital Gains (Investment redeemed after 12 months) above INR. 1.25 lakhs are taxed at 12.5%.

Who Should Invest in Flexi-Cap Funds?

Flexi-cap funds are suitable for investors who can take moderate to high risks. It diversifies your portfolio and balances the risk. You can invest in Flexi-cap funds if you can keep an investment horizon of at least 5 years. 

Conclusion

SEBI launched Flexi-cap as an alternative to multi-cap funds. The aim was to offer flexibility to try different investment scenarios without any restrictions.

With Flexi-cap funds, fund managers can explore market capitalization and periodically update asset allocation. There is a decent chance of earning superior risk-adjusted returns if you can take some risk.

You can always take an expert’s opinion before investing in Flexi-cap funds. VNN Wealth experts can help you shortlist funds and create a strong portfolio, so you won’t have to worry. 

Call us or reach out via email. Start building your wealth today!

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Large Cap Mutual Funds?

Mid Cap Mutual Funds?

Small Cap Mutual Funds?