Both liquid funds and debt funds are types of Mutual Funds.
Liquid Funds are Debt Mutual Funds. They invest in money market instruments with a maturity of a maximum of 91 days. Therefore, they earn the lowest interest rate among debt funds. The best thing about Liquid Funds is that they are highly liquid.
Therefore, Liquid Funds are one of the best mutual funds to earn good returns in a short duration if you have idle money in your bank account.
Debt funds are invested in a portfolio of debt or fixed income instruments like money market instruments and bonds (government, corporate) for a longer period of time. Debt funds give a steady income with lower risks as compared to equities. Liquid funds, ultra short-term funds, short-term funds, dynamic bond funds, long-term income funds and gilt funds are the different types of Debt Funds.
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Debt funds are categorized as:
1. Short-Term Debt Funds:
Short-Term Debt Funds are also called Money Market or Liquid Funds. These are invested for a period of not more than 91 days. The absence of mark to market for securities less than 60 days to maturity, makes them less volatile.
2. Ultra Short-Term plans:
Ultra Short-Term plans invest in money market instruments and short-term securities with a maturity of 365 days. Short Term Plans invest most of your money in short-term debt securities. However, a small portion is invested in long-term debt securities.
Although short-term funds give higher returns than liquid funds and ultra-short term funds, these are highly risky as they are exposed to higher mark to market risks. Short-term securities give interest income and long-term securities, capital gains.
3. Long-Term Debt Funds:
Long-Term Debt funds give both interest income and capital appreciation. The price of securities in Long-Term Debt Funds may go up or down and hence, the total returns are volatile compared to short-term debt funds. This is because market interest rates and price of a bond are inversely related.
SEE ALSO: How to Invest in Liquid Funds?
Income Funds are invested in both short and long-term debt securities. The investment may be spread over Government, Public sector and Private sector companies
5. Gilt Funds:
Gilt Funds are invested in medium and long-term government securities. As it is the government securities in question, risk element is low, liquidity is higher and the prices are sensitive to interest rate changes.
In case of Dynamic Debt Funds, there are no restrictions on the types of securities or their maturity period. When it comes to interest rate risk and credit risk, management of Dynamic Debt Funds are flexible and dynamic.
7. Floating Rate Funds:
As the name goes, Floating Rate Funds primarily invest in floating rate debt instruments. The coupon rate of such securities are not fixed for the term of the instrument. The reset period of such securities is at the time of issuance of the bond. Be Wise, Get Rich.
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