Debt on WebNotes

Banking and PSU debt mutual fund

Mon, 18 May 2026 00:00:00 +0000

A banking and PSU debt mutual fund is a SEBI-categorised debt mutual fund scheme that invests at least 80 per cent of its corpus in debt instruments issued by banks and Public Sector Undertakings (PSUs). The category was defined under the SEBI October 2017 categorisation framework as one of the 16 debt scheme sub-categories. The category provides retail investors exposure to high-credit-quality bonds with relatively predictable returns and low default risk.

Credit quality buckets in debt mutual funds

Mon, 18 May 2026 00:00:00 +0000

Credit quality buckets categorise debt mutual fund holdings by credit rating, indicating the default risk of each instrument. Indian credit ratings are issued by SEBI-registered Credit Rating Agencies (CRAs): CRISIL, ICRA, CARE, India Ratings, Brickwork. Mutual funds disclose their portfolio composition by credit-quality bucket in monthly factsheets.

Credit rating scale

Standard credit-rating scale (long-term):

Rating	Interpretation	Default risk
AAA	Highest credit quality	Negligible
AA+ to AA-	High credit quality	Very low
A+ to A-	Adequate credit quality	Low
BBB+ to BBB-	Moderate credit quality	Moderate
BB+ and below	Below investment grade	High (junk)
D	Default	In default

Indian mutual funds primarily hold AAA and AA-rated instruments. AA- and below are typically held only by credit risk mutual funds .

Debt Fund of Funds (FoF)

Mon, 18 May 2026 00:00:00 +0000

A Debt Fund of Funds (FoF) is a mutual fund scheme that invests in other debt mutual fund schemes. The category sits within the broader Fund of Funds framework under SEBI regulations. Debt FoFs serve specific use cases including target-maturity bond exposure access, debt-portfolio aggregation, and SIP-friendly debt allocation.

For Indian retail investors, Debt FoFs offer:

Target-maturity exposure: Through Bharat Bond ETF FoFs.
Single-scheme debt allocation: Aggregating multiple debt schemes.
SIP-friendly: Standard mutual fund SIP for debt allocation.

The trade-off is the double-TER structure (FoF + underlying scheme) which can erode the modest debt-fund returns.

Floater mutual fund

Mon, 18 May 2026 00:00:00 +0000

A floater mutual fund is a SEBI-categorised debt mutual fund scheme that invests at least 65 per cent of its corpus in floating-rate instruments whose interest rates reset periodically (typically monthly or quarterly). The category was defined under the SEBI October 2017 categorisation framework as one of the 16 debt scheme sub-categories.

For Indian retail investors, floater funds offer:

Hedge against rising rates: Floating-rate coupons adjust upward when reference rates rise.
Moderate yields: Typically 6-7.5 per cent in normal markets.
Lower duration risk: Compared to fixed-rate medium and long duration funds.

This article covers the SEBI category framework, the floating-rate instrument types, the major schemes, the role in rate-hike cycles, and the post-2023 tax treatment.

Long duration mutual fund

Mon, 18 May 2026 00:00:00 +0000

A long duration mutual fund is a SEBI-categorised debt mutual fund scheme that maintains a Macaulay duration greater than 7 years. The category was defined under the SEBI October 2017 categorisation framework as one of the 16 debt scheme sub-categories. Long duration funds are the most rate-sensitive debt category, with NAV moving substantially in response to interest-rate cycles.

For Indian retail investors, long duration funds offer:

Significant rate-cycle alpha potential: NAV appreciates strongly during rate-cut cycles.
Substantial NAV volatility: Can decline 5-10 per cent during rate-hike phases.
Long-term capital-appreciation opportunity: Beyond bond-coupon yield.
Tactical positioning instrument: Suits investors with clear rate-cycle views.

This article covers the SEBI category framework, the typical risk-return profile, the major schemes, the rate-cycle sensitivity, and the post-2023 tax treatment.

Low duration mutual fund

Mon, 18 May 2026 00:00:00 +0000

A low duration mutual fund is a SEBI-categorised debt mutual fund scheme that maintains a Macaulay duration of 6 to 12 months. The category was defined under the SEBI October 2017 categorisation framework as one of the 16 debt scheme sub-categories, positioned between ultra short duration funds (3-6 months Macaulay duration) and short duration funds (1-3 years Macaulay duration).

For Indian retail investors, low duration funds offer:

Short-to-medium horizons (6-18 months): Suitable for deployments where liquid or money-market funds are too short.
Modest yield premium over money market and liquid funds.
Low interest-rate sensitivity: Modest NAV reaction to rate changes.
Good credit quality: Typically AAA/AA+ rated holdings.

This article covers the SEBI category framework, the role in cash management, the major schemes, the comparison with neighbouring categories, and the post-2023 tax treatment.

Macaulay and Modified duration in bond and debt mutual funds

Mon, 18 May 2026 00:00:00 +0000

Macaulay duration is the weighted-average time to receipt of cash flows from a bond portfolio. Modified duration measures the bond-price sensitivity to interest-rate changes. Both are critical metrics for evaluating debt mutual funds and their rate-cycle positioning.

Macaulay duration

Definition

Macaulay duration = Sum of (Time × Present Value of Cash Flow) / Total Bond Price

It represents the weighted-average time (in years) for which the investor must wait to receive the bond’s cash flows.

Medium duration mutual fund

Mon, 18 May 2026 00:00:00 +0000

A medium duration mutual fund is a SEBI-categorised debt mutual fund scheme that maintains a Macaulay duration of 3 to 4 years. The category was defined under the SEBI October 2017 categorisation framework as one of the 16 debt scheme sub-categories, positioned between short duration funds (1-3 years) and medium to long duration funds (4-7 years).

For Indian retail investors, medium duration funds offer:

Medium-term horizons (3-5 years): Suitable for goal funding within this timeframe.
Yield premium over shorter-duration debt categories.
Moderate interest-rate sensitivity: Material NAV reaction to rate changes (positive in rate-cut cycles, negative in rate-hike cycles).
Variable credit quality: AMCs may hold higher-credit-risk papers for additional yield.

This article covers the SEBI category framework, the typical risk-return profile, the major schemes, the comparison with neighbouring categories, and the post-2023 tax treatment.

Medium to long duration mutual fund

Mon, 18 May 2026 00:00:00 +0000

A medium to long duration mutual fund is a SEBI-categorised debt mutual fund scheme that maintains a Macaulay duration of 4 to 7 years. The category was defined under the SEBI October 2017 categorisation framework , positioned between medium duration funds (3-4 years) and long duration funds (>7 years).

For Indian retail investors, medium-to-long duration funds offer:

Medium-term horizons (4-7 years): Suitable for goal funding within this timeframe.
Yield premium over shorter-duration debt categories.
Material rate-cycle sensitivity: Higher than medium duration, lower than long duration.
Tactical positioning instrument: Effective for moderately confident rate-cycle views.

SEBI category framework

The SEBI category requires:

Money market mutual fund

Mon, 18 May 2026 00:00:00 +0000

A money market mutual fund is a SEBI-categorised debt mutual fund scheme that invests in money-market instruments with maturity up to one year. The category was defined under the SEBI October 2017 categorisation framework as one of the 16 debt scheme sub-categories. Money market funds provide ultra-short-term debt exposure with very low interest-rate sensitivity, making them suitable for cash-management roles in retail and institutional portfolios.

For Indian retail investors, money market funds offer:

Yield to Maturity (YTM) in debt mutual funds

Mon, 18 May 2026 00:00:00 +0000

Yield to Maturity (YTM) is the expected annualised return on a debt mutual fund if all bonds in the portfolio are held to maturity. It is one of the most-used metrics for evaluating debt fund expected returns and is reported in monthly factsheets by all major AMCs.

Calculation

For a bond:

YTM is the discount rate that equates the present value of future cash flows to the current bond price.

For a debt mutual fund: