Mutual Fund Types – Debt
Before we go further and figure out how to select a mutual fund, I wanted to give an overview of the types of Mutual Funds. Basically, Mutual Funds could be divided into ‘Debt’ and ‘Equity’
It is generally felt that Debt funds are rather safe and give lower returns that Equity funds. This is true most of the time, but it woulAd be foolish to believe that this is always true.
Debt funds
Here is a list of the type of debt funds.
Liquid funds – Very low risk – These are for money which you keep in a savings bank account. The risk of losing money or not getting interest is minimal. Money can be withdrawn on the same day. In fact, some funds have started giving debit cards against the balance in liquid funds. The annualised return is around 6%
Ultra Short term – Low risk – There are for money which one wants to keep for 1 to 9 months. The returns here are around 7%. These funds can be used in two situations:
- When you have a lumpsum amount and want to invest in an equity mutual fund, but the markets are very high, you should put your money in this type of fund and start an automatic monthly transfer plan to the equity fund.
- When, say, you had invested money in an equity mutual fund for say, your child’s higher education and the date is coming close, then it is wise to take money out of the equity mutual fund and transfer it to something like this fund one or two years before the date the funds are required.
Short term Funds – Low risk – There are for money which one wants to keep for 6 months to 3 years. The returns here are around 7%.
Corporate Bond Funds – Medium Risk – There are for money which one wants to keep for 1 to 3 years. The returns here are around 8%.
Long Term Bond Funds – Medium to High Risk – There are for money which one wants to keep for more than 3 years. The returns here are around 8%.
Long Term G – Sec Funds – Medium to High Risk – There are for money which one wants to keep for more than 3 years. The returns here are around 9%.
Monthly Income Plans (MIP) with less than 25% equity – Medium to High Risk – There are for money which one wants to keep for more than 3 years. The returns here are around 10%
In case of Debt funds, not only does the risk increase with the time duration, it also increases if one does not invest according to the time frame of the fund. For example, if one were to invest in an MIP for a 6 month duration, it would be very risky.
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