Different Types of Debt Mutual Funds (SEBI Categorization Rules)


SEBI had initiated categorization and rationalization of mutual fund schemes vide its circular dated October 6, 2017. SEBI specified a few fund categories and mandated each fund house could have just one fund in each category.

The aim was to reduce the number of funds and make life easier for investors by reducing confusion around scheme names. For more on SEBI categorization rules, go through this post.

In this post, let’s look at different types/kinds/categories of debt mutual funds as per SEBI Categorization and Rationalization of Mutual fund schemes.

Different Types of Debt Mutual Funds

SEBI has divided debt mutual fund schemes into 16 categories. The categorization is on the basis of the type of debt securities that the funds are permitted to invest in.

The classification is on basis of the maturity of the underlying securities, portfolio duration or the credit rating of the security.

  1. Overnight Fund
  2. Liquid Fund
  3. Ultra Short Duration Fund
  4. Low Duration Fund
  5. Money Market Fund
  6. Short Duration Fund
  7. Medium Duration Fund
  8. Medium to Long Duration Fund
  9. Long Duration Fund
  10. Dynamic Bond Fund
  11. Corporate Bond Fund
  12. Credit Risk Fund
  13. Banking and PSU Fund
  14. Gilt Fund
  15. Gilt Fund with 10-year constant duration
  16. Floater Fund

I will represent the information in terms of interest rate risk or the credit risk that a particular fund category should take.

different types of debt mutual fund schemes sebi categorization difference between debt mutual funds

*Medium Duration Funds, Medium to Long duration funds:  For these two categories, the fund manager, based on interest rate outlook, is permitted to reduce the portfolio duration to up to 1 year. Clearly, you can expect the manager to reduce duration if the fund manager feels that the interest rates are headed upwards.

*Floater funds (due to their nature) are less susceptible to interest rate risk.

What is Interest Rate and Credit Risk?

Debt mutual funds are not without risk. You must not ignore the risks associated with debt mutual funds too. You must understand, unlike equity mutual funds, the upside is capped in debt mutual funds.  Therefore, in my opinion, it is doubly important to understand the risk that you are taking in your debt investments.

I have discussed the various types of risks associated with a debt mutual fund in great detail in this post. Will discuss in brief in this post.

Interest Rate Risk: Bonds prices and interest rates are inversely related. When the interest rates go up, bond prices go down. When the interest rates go down, bond prices go up. Since a debt mutual fund is a portfolio of debt securities, the NAV of debt mutual funds also has a similar relationship with the interest rate movements.

It is not that every debt mutual fund will have similar sensitivity to interest rate movements. A few funds may go up (or down) than other funds when the interest rates go down (or go up). This sensitivity is measured/represented in the form of duration (discussed later).

Credit Risk: The company, in whose bond the fund has invested, may default on interest or principal payment i.e. the invested money may not come back. The credit rating of the company/issue may be downgraded which can result in lower bond price. This is the credit risk for you.

The government won’t default on its payments. Therefore, government (gilt) securities have zero credit risk. Higher credit rated bonds have a lower probability of default as compared to lower-rated bonds.

What is Macaulay Duration?

Duration is the measure of interest rate sensitivity of a bond/bond portfolio/mutual fund portfolio.

Typically, a bond with a longer maturity is likely to have a higher duration. Duration of a bond portfolio (MF portfolio) is the weighted average of duration of underlying bonds.

A higher duration implies higher interest rate sensitivity.

Macaulay duration is one of the ways to calculate duration. Modified duration is another.

Macaulay duration is a measure of how long it takes to recoup your original investment in the bond.  Modified duration is, in fact, a measure of how the price of a bond/bond portfolio will change in response to movement in interest rates.

If you dig deeper into the maths, you will be able to see that Macaulay duration and modified duration are related.  For the difference between Macaulay and Modified duration, suggest you go through this link on Investopedia.

Won’t go into the calculation in this post.

Point to Note

When it comes to interest rate risk, there are two kinds of specifications in SEBI circulars:

  1. Portfolio Macaulay Duration
  2. Maturity of the underlying security

Wherever Macaulay Duration is mentioned, it refers to Portfolio Macaulay Duration (and not of individual securities in the portfolio). For instance, in a low duration fund, it is possible that an underlying security may have a duration less than 6 months or higher than 12 months. However, at the portfolio level, the duration shall be within the range of 6 to 12 months.

Wherever Maturity (of underlying security), it pertains to maturity of securities of the underlying portfolio. For instance, in a liquid fund, the maturity of each of the security shall be less than or equal to 91 years.

By the way, a bond with longer maturity will have higher duration too.

There are still a few issues

SEBI Categorization of MF schemes has clearly made things much simpler. Earlier, there were no clear investment guidelines except for liquid funds. And this made life difficult for investors and advisors alike.

However, even after this categorization, you cannot simply look at the fund category and pick it up a scheme.


As you can see in the table, you have restrictions on either interest rate risk specifications (duration, maturity) or the credit risk specifications (corporate bonds, Government Bonds). Not both.

Only a few categories (such as money market fund, Gilt fund with a Constant maturity of 10 years) have specifications pertaining to both interest rate risk and credit risk.

Let’s try to understand the issue with the help of an example.

Let’s assume you want to invest in a debt fund with lower interest rate and credit risk.

We know that liquid funds, ultra-short duration funds and low duration funds have lower interest rate risk (since the duration is lower).  However, for the same categories, there is no restriction on how much credit risk they can take.

Therefore, a low duration fund (A) that invests only in AAA-rated bonds will have lower credit risk than another low duration fund (B) that invests say up to 30% in A rated bonds. It is quite possible the Fund B gives you better returns than Fund A. However, you must not ignore that this excess return has come by taking extra credit risk.

Therefore, you will still need to go through scheme information document to look at the kind of bonds (credit quality wise) that the scheme can invest in. The bigger problem is that most scheme mandates will not have this information. In such cases, you may have to look at the scheme portfolios to make an assessment. Not very reliable but that’s what you have to live with.

So, your work has been reduced but not eliminated.

Past performance of many schemes may become irrelevant

If the nature of the scheme has changed and other schemes have merged into the scheme, past performance of the scheme may lose its relevance.

If an erstwhile Short Term Gilt fund is now a Gilt Fund with a constant maturity of 10 years, then you need to revisit your reasons for investing in the scheme. The fund is now a completely different fund. Past performance is simply useless in such cases.

If other schemes have merged into the X (say) scheme, the past performance of scheme X will now be a weighted average of the merged schemes.

By the way, this is a problem with both equity and debt funds.

If you can’t select funds on own, you can talk to a SEBI Registered Investment advisor (SEBI RIA) or a fee-only financial planner. Such an advisor can help select the right debt funds for you.

What do I do?

I prefer to invest in debt funds that have lower interest and credit risk.

Depending on the requirement, I will stick with liquid, ultra-short duration and low duration debt mutual funds. Of course, I will have to dig deeper to shortlist funds that invest in high credit quality securities too.

Cost (expense ratio) is extremely important. The lower, the better.

That’s my choice.

You may look at your debt investments differently and may choose other kinds of funds.

How do I check if my debt mutual fund scheme has changed?

There are many ways. You must have received e-mails from AMCs (mutual fund houses) about the change in your scheme name or nature.

You can also browse through the AMC websites. However, I must tell AMCs have made this awfully painful.

Additionally, there are a few websites that have compiled the list of schemes (and changes) in a single web page. Here are a few links: Link 1 Link 2

Additional Read

  1. SEBI Circular on Categorization and Rationalization of Mutual Fund Schemes (October 6, 2017)
  2. SEBI Circular on Categorization and Rationalization of Mutual Fund Schemes (December 17, 2017)
  3. What are the Risks in Debt Mutual Fund Schemes?
  4. Why your best mutual fund schemes may not remain as the “Best” (Relakhs.com)

8 thoughts on “Different Types of Debt Mutual Funds (SEBI Categorization Rules)”

  1. Hello Deepesh,
    Thanks for informative post.
    Would you say ultra short duration fund
    from well known AMC which invests only in AAA rated bonds is 100% safe investment ?
    But can’t they change style of investing any time ,how do we come to know ?
    From safety perspective, would you say both, liquid and ultra short duration funds are same if held upto maturity period ?
    Can we hold ultra short duration fund for more than maturity period, say 10 years ,is there any disadvantage ?


    1. Deepesh Raghaw

      Hi Dipak,
      1. Nothing is 100% safe. Higher credit quality will certainly reduce chances of default. In case there is change in investment pattern (beyond what is provided in scheme info document), you will be notified by e-mail.
      2. See, maturity is for underlying bonds. MFs have ever-lasting portfolios. Bonds will mature and will be replaced by newer bonds. So, no such thing as holding an MF till maturity.
      3. You can hold any fund for as long as you want. No restriction on that front.

      1. Thanks for reply.
        So would you suggest liquid fund over ultra short duration fund for STP purpose or saving purpose in debt category ?
        Difference between these two is approax 1 % return wise.

  2. Hi Deepesh

    Thank you for the good article. From the new classification can I assume that “Money Market Funds” are more safe than Liquid/ Ultra/Low duration funds, as they invest only in treasury bills, CDs, CPs, repo etc. and duration is only up to 1 year. BTW some of these funds outperformed the other category. Still not seen manty are talking about Money Market funds.


    1. Deepesh Raghaw

      Hi Santhosh,
      You are welcome.
      It is a new category.
      Plus, the interest rate risk is likely to be higher as compared to liquid funds.
      But yes, I do expect it to catch up. I would expect credit risk to be relatively low too.
      Btw, from what I have seen, some not so good companies have also been able to access CP market in the past.

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