Debt funds, by safety and time
Two risks, and the duration ladder
Debt funds feel dull next to equity, and that is exactly their job. But the exam is sharp here, because it tests two different risks and a ladder of categories that people blur together. Start with the risks. Every debt fund carries interest-rate risk, bond prices fall when market rates rise, and credit risk, the chance a borrower defaults. Almost everything else in this lesson is a variation on how much of each risk a category takes.
Most debt categories are arranged by duration, and the rule is simple: longer duration means more interest-rate sensitivity. At the bottom sit the cash-parking funds, Overnight (1-day paper) and Liquid (up to 91 days), with Money Market funds holding paper up to 1 year. Climb the ladder through Ultra Short, Low Duration, Short, Medium, Medium-to-Long and Long Duration, and each step holds longer maturities that earn a little more in calm times but fall harder when rates jump. A Dynamic Bond fund is the exception that roams across the whole ladder as its manager sees fit.
A few categories are defined by credit rather than time. A Corporate Bond fund holds mostly high-rated (AA+ and above) paper, playing it safe; a Credit Risk fund deliberately holds lower-rated paper to chase higher yield, accepting more default risk; and a Gilt fund holds at least 80% in government securities, so it has almost no credit risk but still the full interest-rate risk of its duration. The skill the exam rewards is naming, for any debt fund, which of the two risks it is really taking, and how much.
- 1
Debt funds lend, they hold bonds and money-market instruments, not shares, so they are steadier than equity.
- 2
Every debt fund carries two risks, interest-rate risk (bond prices fall when rates rise) and credit risk (a borrower may default).
- 3
SEBI groups most debt funds by duration, longer duration means more interest-rate sensitivity.
- 4
Overnight funds hold 1-day paper; Liquid funds hold instruments maturing within 91 days; Money Market funds hold paper up to 1 year.
- 5
Up the ladder, Ultra Short, Low Duration, Short, Medium, Medium-to-Long and Long Duration funds hold progressively longer maturities and swing more when rates move.
- 6
Some categories are defined by credit instead, a Corporate Bond fund holds mostly high-rated (AA+ and above) paper, while a Credit Risk fund deliberately holds lower-rated paper for higher yield.
- 7
A Gilt fund holds at least 80% in government securities, so it has almost no credit risk but full interest-rate risk.
Park idle cash for a week and a Liquid fund (up to 91-day paper) fits. Lock in for five years and a Long Duration fund can earn more, but if rates rise sharply along the way, its price will fall the hardest, that is interest-rate risk climbing the ladder.
Practice
🔥 0 streakReal exam format. Answer by voice, tap, or press 1 to 4. No negative marking, so always attempt.
A Liquid fund holds instruments maturing within:
As a debt fund's duration gets longer, its:
A Credit Risk fund differs from a Corporate Bond fund because it:
A Gilt fund carries almost no credit risk because it holds at least 80% in:
When interest rates in the economy rise, the price of a debt fund's existing bonds generally:
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Education for the exam, not financial advice. Answers can be wrong, so confirm figures against the workbook.