15 Common Types Of Debt Funds In India

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.

  1. 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. 

  1. 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. 

  1. 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.

  1. 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.

  1. 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.

  1. Medium Duration

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

  1. 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.

  1. 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.

  1. 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. 

  1. 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.

  1. 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. 


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.