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What are the SEBI Guidelines for Debt Mutual Funds?

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July 7, 2022


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Ensuring the protection of investor rights is one of the most important priorities of the securities market regulator of any country. 

In India, the Securities Exchange Board of India (SEBI) has laid guidelines for each type of mutual fund. The guidelines ensure elaborate segregation of mutual fund types and their structure. 

Recently, these SEBI guidelines for debt mutual funds were revised.

But before you learn about these changed norms, let us start by learning about debt mutual funds and how SEBI identifies them so that you can make the most of investing in them.

What are Debt Mutual Funds? 

Based on its underlying assets, if a mutual fund’s investment universe includes only debt investments, then it is called a debt mutual fund

To ensure that each mutual fund type is unique from another, SEBI issued a circular called the “Categorisation and Rationalisation of Mutual Fund Schemes” in 2017. The latest guidelines have been issued vide SEBI Master Circular for Mutual Funds in May 2023.

This circular divided debt mutual funds into 16 sub-categories. 

These categories are as follows: 

  • Overnight fund - As per its name, this debt mutual fund invests in overnight debt securities with a maturity period of one day. 
  • Liquid fund - This scheme invests in debt & Money Market securities with a maturity of upto 91 days only.
  • Ultra-short duration funds - These are short-duration debt funds with three to six months of maturity. 
  • Low-duration funds- These funds invest in debt instruments for a maturity period of six to twelve months. 
  • Money-market funds- Specifically investing in the money market, these funds have a one-year maturity period.
  • Short-duration funds- These funds invest in a mix of debt and money markets and have a maturity period of one to three years.
  • Medium-duration funds- They invest in similar investments as the short-duration funds but have three to four years of maturity.
  • Medium-to-long duration funds- By investing in similar securities as the medium-duration funds, they have a maturity period of four to seven years. 
  • Long-duration funds- These funds invest in a combination of debt and money market securities and have a maturity period of more than seven years. 
  • Dynamic bond scheme- This fund is dynamic because it invests across different maturity durations.
  • Corporate bond fund-  Minimum 80% of their underlying assets comprise AA+ and above rated corporate bonds. 
  • Credit risk fund- A minimum of 65% of its investments are in AA and below-rated bonds.
  • Banking and PSU fund- They invest up to a minimum of 80% of their total investments into debt instruments of banks and Public Sector Units (PSUs). 
  • Gilt fund- These funds invest majorly at a minimum of 80% of total assets in government securities of different maturity periods.
  • 10-year constant duration Gilt fund These are Gilt funds investing in government securities having uniform 10-year maturity.
  • Floater fund- These funds can offer fluctuating returns from debt investments by investing a minimum of 65% of total assets in floater rate instruments like swaps and derivatives. 

What are the SEBI Guidelines for Debt Mutual funds?

  • New norms for minimum liquidity holdings in debt mutual funds

In November 2020, the securities markets regulator, SEBI, issued revised guidelines for debt mutual funds. 

The new SEBI guidelines for debt mutual funds introduced the minimum liquid holdings for these mutual funds. 

According to the guidelines, debt mutual funds must invest at least 10% of their assets in liquid holdings. To fulfil the minimum liquid holding criteria, they can invest in government securities (G-Secs), cash instruments, treasury bills and repo or repurchase agreements. 

This maintenance of liquid holding proportion will be mandatory for all types of debt mutual funds. For example, a Banking and PSU fund invests 80% of the total investments into bank and PSU debts. Now with the new SEBI guideline for debt mutual funds, the 10% portion of the debt fund can only be invested in liquid securities. Therefore, the bank and PSU debt component in a Bank and PSU debt fund will be 80% of the 90% proportion left. 

Therefore, per the new SEBI guidelines for debt mutual funds, an overall 72% of the bank and PSU debt fund can be invested into debt investments of banks and PSUs. 

The same rule also applies to corporate bond funds. The proportion of AA+ and above-rated corporate securities can be 72% of the total investment. 

The only exemptions to the new SEBI guidelines for debt mutual funds are overnight, liquid, and Gilt funds. 

  • Holding debt securities of a single issuer

In March 2021, SEBI levied restrictions on mutual funds for holding debt securities of a single issuer. 

For some debt mutual funds, SEBI has increased the limit, and for some, the norms have been tightened. 

  • For instance, a debt mutual fund can invest a maximum of 10% of its total assets in bonds by different issuers of Tier 1 and Tier 2 notes. These Tier 1 and Tier 2 notes are also known as Bank Bonds. However, these debt funds can only invest a maximum of 5% of their assets in bonds issued by a single issuer.
  • For liquid mutual funds, this limit of investing in debt securities by a single issuer was increased to 10%. 

Summing up

The SEBI guidelines for debt mutual funds were formed to differentiate one debt mutual fund from another and protect investors from getting into too much risk while investing in debt mutual funds. 

These norms keep changing from time to time to fit into the growing needs and manage the challenges of the mutual fund investors. 

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Frequently Asked Questions

1. Can I invest a lump sum in a debt mutual fund?

You can invest in debt mutual funds through a lump sum. Both SIP (Systematic Investment Plan) and lump sum routes are available for investing in debt mutual funds. 

2. Do debt mutual funds guarantee returns?

Debt mutual funds can offer stable and low-risk returns. These investments have default risk, interest rate risk and credit risk that can impact your returns. 

As per the SEBI 2017 circular, there are 16 sub-types of mutual funds, each having different underlying investments, maturity and risk. Therefore, returns from debt mutual funds cannot be guaranteed for all types.

3. Can debt mutual funds give negative returns?

Debt mutual funds with moderate to moderately high risk can give negative returns as they can have credit and default risks. 

This is especially possible with debt mutual funds like credit risk funds. 

4. What is SEBI mutual fund?

SEBI mutual funds are mutual funds that are registered and regulated by SEBI. They are required to adhere to SEBI regulations regarding investment, operations and disclosure.

5. Is SEBI the mutual fund regulator?

Yes, SEBI  is the regulator of mutual funds in India Mutual funds in India need to be registered with SEBI and comply with SEBI regulations regarding investment, operations, and disclosure. SEBI also monitors the performance of mutual funds and takes action against any fund or fund house that violates regulations. It ensures that mutual funds operate transparently and fairly.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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