They may not be as high-profile as equity funds, nor are their returns dazzling. But balanced funds, monthly income plans (MIPs) and debt funds offer investors something far more satisfying: stability and safety. While hybrid funds invest in a mix of equity and debt instruments, debt funds do not have any equity exposure. Debt funds are generally safer than equity-based funds because the debt market is not as volatile as the equity market. Let us look at how hybrid and debt funds are different from equity funds.
Balanced funds:
These funds divide their corpus between equities and debt instruments to reduce the stock market-related risk. The exposure to equities differs from fund to fund. A balanced fund can be equity-oriented or debt-oriented depending on this exposure. Balanced funds tend to outperform equity funds in a bearish phase.
Asset Allocation funds:
These funds follow variable investment policies and rejig their exposure to equity, debt and cash as per the outlook of specific markets. The fund manager can allocate more funds to equity when equity market is expected to perform well, and to debt when debt market is expected to do well. However, performance of such funds depends on the skills of the fund manager in anticipating the market movements.
MIPs and Capital Protection funds:
Monthly income plans seek to generate steady but modest returns. With only 15-20% of their corpus in equities, these are ideal for people (especially retirees) seeking a steady stream of income. Capital protection funds are closed-ended funds that aim to give investors a minimum sum on maturity. These funds invest 70-80% of their corpus in debt and 20-30% in equities. The debt and equity investments are structured in a way that on maturity the investor gets at least his investment back.
Income funds:
Income funds do not have an equity exposure and invest in bonds and other fixedincome securities. If interest rates rise, the net asset value (NAV) of these income funds go down because they hold bonds of lower coupon rates. On the other hand, if interest rates fall, the value of their holdings goes up, pushing up the funds’ NAV. Apart from the interest rate risk, there is also a credit risk if the bond issuer is not able to repay on maturity.
Gilt funds:
Gilt funds are also like income funds and carry the same interest rate risk. But since they invest only in government securities, there is no credit risk involved.
Floating Rate funds:
These funds provide a hedge against a fall in the value of bonds in case of a rise in interest rates, which happens in case of income and bond funds. Floating rate funds are advisable in a rising interest rate scenario.
Liquid funds:
Liquid funds invest in short-term debt securities (of less than one-year duration) like treasury bills issued by government, certificates of deposit issued by banks, commercial papers issued by companies and other money market instruments. These funds offer a high liquidity and are a good place to park a big sum of money in the short term.
