Welcome back. In the last video we saw the classification of mutual funds by mode of operations. Now let's look at another classification. we classify mutual funds by investment patterns, investment patterns, we mean that where does the mutual fund invest in to get the returns for the for the investors. So here we basically look at three types of funds Initially, the bottom we have debt funds. Now these are the least risk funds because they invest in debt.

And the most most risky bonds are the equity funds, which invest in equities. In between we have the balanced Fund, which invests some amount of money in debts and some amount of money in equities. We will look at what is debt and equity in details in the following lectures. We start with debt funds. Debt funds are also known as bond funds. This basically because the debt fund is an instrument tool in which the core holdings are in fixed income instruments, fixed income instruments basically we are referring to short and long term bonds or securitized products or money market instruments of floating rate debts.

Now, in debt funds, the basic earning comes from the interest what is earned from giving a debt. Now, the bonds are maybe government bonds or semi government bonds. So, essentially bonds means I owe you So, I am giving money to somebody expecting a return on that money along with some interest. So, that that's why bonds are very low risk. And income is all is guaranteed. Unless of course, there are situations like where the person defaults in terms of going bankrupt etc.

That's why debt funds are very low risk funds and like we Know that if the instrument is low risk, the returns are also low from the instrument. When we say low returns, it should be taken with a pinch of salt, because there are times in the economy when the bond market booms For example, when the government starts borrowing money from the private market in a heavy manner, the bond market booms under these circumstances the debt funds can give you a very high return. So, but in general, the debt funds give a return which is slow maybe more than what a fixed income like a fixed deposit or recurring deposit can give an investor. Another significant thing to notice that dead funds put most of their money in debts. That does not mean the dead funds put hundred percent of the money in debts. So, it is possible that the debt funds would 80 to 90% of the money in debt.

10 To 20% of the money in equities. So there will be some element of risk in the debt funds from the equities equity market as well. presented here is one example of a debt fund. We take the example of SBI dynamic bond fund. Look at the holding pattern. There is no exposure to equities.

So this is God's zero exposure to equities it is largely exposed to debt and some instruments similar to debt. Look at the allocation of funds here majority of the funds allocated to government of India security the central India central government loans. Now we'll take a look at the different type of debt funds. These are by far the most popular ones and that's why we will have We'll look at each of them in brief. We first look at guild funds. Now, the primary objective of guild funds is capital appreciation does understand it by how the guild funds operate.

The government. Let's say the government of India asks for money from the Reserve Bank of India. Reserve Bank of India gives the government money but before it can give the government money, the Reserve Bank of India collects this money from the market. Now, the investors who give money to Reserve Bank of India, give it at an interest rate agreed. And in return for their money, the Reserve Bank of India issues them, OH, security. Now, these securities normally have a maturity in the range of 15 years, 30 years or maybe three years, five years also.

Now, when the security matures, RBI returns the money to the investor, and the investor returns the security back to the RBI. That's why the investments in these gilt funds are extremely secure because there's no chance of default in getting the money back from RBI. However, the gilt funds are very highly sensitive to interest rates, the interest rates are set by RBI from time to time, when the interest rates are going down. gilt funds perform very highly. This is true for any bonds when the interest rates go down. The bond market in general goes up.

However, when the interest rates goes up, the good Funds suffered very heavily. That nav the net net asset value of jail funds is extremely volatile. That's why investors who have a moderate to higher tolerance for risk should look for investing in this yield fund. Next, we look at income funds. Now, unlike gilt funds, income funds, invest in varieties of fixed income securities, such as bonds debentures government securities, and the key is they invest in these fixed income securities across different maturity profiles. For example, the Income Fund may invest in a corporate bond which has got a maturity period of two to three years and also the government security which may have a maturity period of 20 years to 30 years.

Now, since the investment has gone such varying maturity profiles, the It is to both hold to maturity and also take a direction call. Now, why deviation call is because we know that bonds can be sold before maturity also. However, when we sell bonds before maturity, they may into income or they may into loss. Either way it can happen, but the average maturities of income funds is between seven to 20 years, like gilt funds. Income funds also are very highly sensitive to interest rates, when interest rates go down income part is very heavily and when interest rates go up in compounds yield decreases. So, investors with moderate to high risk tolerance levels should invest in income funds.

Now, we discussed short term debt funds. Now, these short term debt funds, they basically invest in commercial paper certificates of deposits or short maturity bonds. Now, the average maturity period of these instruments is normally two to three years. That's why the chances of default in these instruments is very minimal. These are basically loans which are given to given for different purposes and they have to be recovered in a very short period of time. As a result, these are very low risk instruments.

So, the short term debt funds a very low risk and the investors are looking for getting a regular income can invest in the short term debt funds. Next we discuss credit opportunities funds and other credit opportunities funds are very similar to short term debt funds. The difference is that credit opportunities funds invest in low rated corporate bonds. The low rated corporate bonds basically means that the bonds which are released to the corporates, they are rated by agencies like Christine etc as triple A double a triple A plus etc. The the bonds which are low rated like triple A or triple A or double A. These are the ones which are taken by investment by this car.

Opportunity's funds. So they also have a maturity of two to three years. However, the risk is a little bit greater than short term debt funds, because these bonds are slightly lower rated. However, these are the even the low ratings a little bit low, they're not at all very risky at all. So the investors with low risk low risk tolerance levels looking for slightly more income than short term debt funds to have regular incomes, can invest in these credit opportunities funds. Next, we'll discuss fixed maturity plans.

Now, unlike the other ones, we have been discussing, so far, fixed maturity plans or close tendered schemes. That is, once these maturity plants are announced, the one has to invest in these fixed maturity plans. Once the FMP is are in force, and one cannot invest in these MPs. This is because the MPs they involve invest in fixed incomes. quantities, which are matching the carrier of the scheme for which this has been announced. Now, the the strategy is that the investments are held to maturity at the maturity the income is returned back to the investors.

The returns from FMP is a very simple now the investors with no risk tolerance looking for stable returns and tax advantage over a three to five years time horizon can invest in these SMEs. The next debt funds that we'll discuss are the liquid funds, liquid funds invest in money market instruments like term deposits, treasury bills etc. Now, they provide an opportunity to earn returns without compromising on the liquidity of the instrument. Now, here the maturity is typically in less than 91 days. Now, this gives a substantial reasonably higher return than Savings Bank returns. So, it is very suitable for investors are looking for in return Higher than Savings Bank returns and having a lot of money lying in the savings account.

The last debt fund that we discuss are the monthly income plants. Now, these are hybrid mutual funds in the sense that they invest about 75 to 80% of the portfolio in fixed income securities, and about 20 to 25% in equities. As a result, they generate slightly higher returns than the debt funds, while they are also much riskier than the debt funds. With this, I hope you had a reasonable tour of the debt funds. Next up we will discuss the equity funds. Thank you for watching See you in the next lecture.