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Debt Markets

Where can you purchase or sell Fixed Income Securities?

The market for Debt Securities is way bigger than equity markets. Unlike equities, Fixed Income securities expire after a period of time. Also, these securities can be very illiquid, because once new securities are issued, there’s no active market where these securities are traded regularly. 


There are 2 ways through which we can buy debt securities, let's discuss each point in detail:


A.Through OTC Markets:


Securities like bonds don’t trade on a formal exchange. Various institutions like RBI, State Government, private institutions can issue these securities. 


The market for Bonds, etc., is known as Over-The-Counter (OTC) markets. Here, securities trade without the supervision of a regulator.


OTC markets are also called Dealer Markets because anyone who wishes to buy or sell a bond has to go to a dealer and buy from them at a quoted price.


We can see the data of bonds that are currently trading over the OTC markets on NSE.Since OTC markets are illiquid, it becomes very difficult to sell a security in the future.



The primary advantage of OTC markets is that the contracts here are customisable because there is no exchange present to standardize a contract.


The ticket size for buying these securities is huge, and everyone can’t buy them.


B.Through Mutual Funds:


A mutual fund is a vehicle where large sums of money is collected from a pool of investors and invested in various types of asset classes. 


Debt Mutual Funds are mutual funds which invest in various debt securities.


First of all, there are 16 types of debt mutual funds from which an investor can choose. A brief description has been given below:


1. Overnight Fund:

Overnight funds are funds which invest in assets that mature in 1 day, or on an overnight basis. This category of debt funds was introduced as part of SEBI's mutual fund reclassification exercise in 2018.


2. Liquid Fund:

Liquid funds are funds which invest in fixed income instruments such as, Treasury Bills, Commercial Papers, etc., instruments that mature on or within 91 days.


3. Ultra-Short Duration Fund:

Ultra-short-term funds are funds which invest in fixed-income securities that have a maturity up to six months. The average duration of the fund is between 3-6 months.


4. Low Duration Fund:

Low duration funds invest in a range of money market and debt securities in such a way that the portfolio duration of that fund ranges between 6 to 12 months. These funds have high interest rates and credit risk when compared to liquid and overnight funds, but they are among the lowest risk funds within the family of duration funds.


5. Money Market Fund:

Money Market Funds are debt funds that invest in debt securities which have a maturity of 1 year or less.


6. Short Duration Fund:

Short duration funds are debt funds which invest in debt and money market securities and duration of the fund is between 1 and 3 years. These funds earn through interest income and capital gains on their debt holdings.


7. Medium Duration Fund:

Medium Duration Funds are funds which invest in debt securities and money market instruments in such a way that the Macaulay Duration of the fund’s portfolio is between 3-4 years. These funds are recommended to investors who have an investment horizon of at least 4 years.


8. Medium To Long Duration Fund:

Medium To Long Duration Funds are funds that invest in Long-term debt securities and have a portfolio duration between 4-7 years.


9. Long Duration Fund:

As the name suggests, Long Duration Funds are funds that invest in debt securities and have a portfolio duration of more than 7 years.


10. Dynamic Bond:

Dynamic Bond funds invest in bonds which have various duration . The main objective of this fund is to provide sustainable returns during both rising and falling markets.


11. Corporate Bond Fund:

80% of Funds are invested in the highest-rated corporate bonds in a Corporate Bond Fund.


12. Credit Risk Fund:

65% of funds are invested in Corporate Bond which has a rating below AA+ in a Credit Risk fund.


13. Banking & PSU Fund:

80% of funds are allocated to PSUs in a Banking & PSU Fund.


14. Gilt Funds:

In a Gilt Fund, 80% of funds are allocated to Government Securities.


15. Gilt Funds with 10 years constant duration:

The total portfolio duration of this fund is equal to 10 years.


16. Floater Fund:

65% of the funds are allocated in floating-rate bonds in a Floater Fund.


As you can see, different schemes have different characteristics, and an investor should choose a mutual fund scheme according to his/her risks and preferences. So, in the next unit, we will learn the steps to select the best debt funds. 

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