Fund Types · Chapter 9 / 35
Debt fund categories — duration vs credit
Sixteen SEBI buckets, organised by interest-rate sensitivity (duration) and credit quality.
Debt funds invest in bonds, money-market instruments, and other interest-bearing securities. Returns come primarily from interest accrual and from price changes when interest rates move (price moves up when rates fall, and vice versa).
SEBI's 2017 categorisation splits debt into 16 categories. The taxonomy organises along two dimensions: duration (sensitivity to interest-rate moves) and credit/strategy (what kinds of bonds the fund prefers).
The duration ladder
Macaulay duration measures average years until the cashflows are received, weighted by present value. Higher duration = more rate-sensitivity.
| Category | Macaulay duration | Typical use |
|---|---|---|
| Overnight | 1 day | Idle cash parking |
| Liquid | Up to 91 days | Emergency fund |
| Ultra-Short Duration | 3-6 months | 6-12 month goals |
| Low Duration | 6-12 months | 12-18 month goals |
| Money Market | Up to 1 year | Short-term liquidity |
| Short Duration | 1-3 years | 2-3 year goals |
| Medium Duration | 3-4 years | 3-5 year goals |
| Medium to Long Duration | 4-7 years | 5-7 year goals |
| Long Duration | 7+ years | Locked-in rate bets |
The credit / strategy buckets
- Corporate Bond: 80%+ in AA+ and above. Higher quality, lower yield.
- Banking & PSU: 80%+ in bank, PSU, public-finance bonds. Effectively quasi-sovereign credit.
- Credit Risk: 65%+ below AA+. Higher yield, higher default risk.
- Gilt: 80%+ in government securities. Zero credit risk; pure duration play.
- Gilt with 10Y Constant Duration: 80%+ G-secs + maintain 10Y duration. Most rate-sensitive.
- Dynamic Bond: no duration mandate — manager flexes based on rate view.
- Floater Fund: 65%+ in floating-rate instruments. Lower duration risk by design.
Risk dimensions
Debt funds can lose money in two ways:
- Interest-rate risk: rising rates → bond prices fall. Hits long-duration funds hardest.
- Credit risk: a held bond defaults. Hits credit-risk funds hardest. The 2018-2020 IL&FS / DHFL / Franklin Templeton episodes are the most-documented Indian examples.
Practical picks by time horizon
- Up to 6 months: Overnight or Liquid.
- 6-18 months: Ultra-Short or Low Duration.
- 1-3 years: Short Duration or Money Market.
- 3-5 years: Medium Duration or Corporate Bond.
- Rate-view bets (any horizon): Dynamic Bond or Gilt.
Sources
- SEBI — Categorisation and Rationalisation of Mutual Fund Schemes · accessed Jun 2026
- AMFI — Debt Funds Investor Education · accessed Jun 2026