Debt fund categories
SEBI's 17 kinds of debt fund: what each must hold, how they differ, and how the gains are taxed now
Categories as per SEBI's Master Circular of 20 March 2026; fund assets as on 31 August 2026
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
Open by asking the room to name as many kinds of debt fund as they can in one minute, and write them up. Expect a mix of current names, old names and marketing labels. This deck sorts them into SEBI's 17 categories. It builds on the decks on duration and on credit risk.
A debt fund's category name is a rule about what it must hold.
SEBI defines 17 debt categories. Most are set by one of three things: how soon the holdings mature, how sensitive the portfolio is to interest rates, or who the borrowers are.
Trainer notes
A scheme's name must be the same as its category (Master Circular para 3.8.7), so the name on the factsheet tells you which rule applies. Existing schemes had until 26 August 2026 to comply.
Three ways SEBI draws the lines
One category is left over: the Dynamic Term Fund, which may invest across duration with no band.
- 3
By maturity of holdings
Overnight, Liquid and Money Market Funds. Each holding must mature within a limit: 1 day, 91 days or 1 year.
- 6
By portfolio duration
Ultra Short Term to Long Term Funds. The portfolio's Macaulay duration must stay within the category's band.
- 7
By borrower or type
Corporate Bond, Credit Risk, Banking and PSU, Gilt, 10-year Gilt, Floating Interest Rates and Sectoral Funds.
Source: SEBI Master Circular for Mutual Funds, 20 March 2026, para 3.8.2. The grouping into three is ours; SEBI numbers the categories 1 to 17.
Trainer notes
3 + 6 + 7 + 1 = 17. The grouping is ours, to make the list easier to remember. The 10-year Constant Maturity Gilt Fund is defined both by borrower (government) and by duration (10 years), which is why the duration deck counts seven duration-based categories. Macaulay duration is explained in the duration deck.
The short end: five categories
Listed in SEBI's order. Assets are net assets of all schemes in the category on 31 August 2026.
| Category | What it must hold | Assets (₹ crore) |
|---|---|---|
| Overnight Fund | Overnight securities that mature in 1 day. | 90,798 |
| Liquid Fund | Debt and money market securities that mature in up to 91 days. | 7,18,026 |
| Ultra Short Term Fund | Debt and money market instruments; portfolio Macaulay duration of 3 to 6 months. | 1,31,768 |
| Ultra Short to Short Term Fund | Debt and money market instruments; portfolio Macaulay duration of 6 to 12 months. | 1,13,696 |
| Money Market Fund | Money market instruments that mature in up to 1 year. | 3,39,896 |
Sources: SEBI Master Circular for Mutual Funds, 20 Mar 2026, para 3.8.2; AMFI Monthly Note, August 2026 (month-end assets).
Trainer notes
An Overnight Fund may also keep up to 5% in government securities or Treasury bills of up to 30 days, to place as margin. A Liquid Fund charges an exit load on money withdrawn within 7 calendar days. Money market instruments are covered in their own deck. Short maturity means small price swings, not none, and not zero credit risk.
Longer duration: five categories
Each invests in debt and money market instruments. A band is the Macaulay duration of the whole portfolio; the last has none.
| Category | Portfolio Macaulay duration | Assets (₹ crore) |
|---|---|---|
| Short Term Fund | 1 year to 3 years. | 1,05,045 |
| Medium Term Fund | 3 years to 4 years. May go down to 1 year in an anticipated adverse situation. | 25,436 |
| Medium to Long Term Fund | 4 years to 7 years. May go down to 1 year in an anticipated adverse situation. | 9,944 |
| Long Term Fund | More than 7 years. | 11,435 |
| Dynamic Term Fund | No band. It may invest across duration. | 29,986 |
Sources: SEBI Master Circular for Mutual Funds, 20 Mar 2026, para 3.8.2; AMFI Monthly Note, August 2026 (assets on 31 Aug 2026).
Trainer notes
The longer the duration, the larger the change in NAV for the same change in yields; the duration deck works this through. When a Medium Term or Medium to Long Term Fund goes below its floor, the AMC must record its reasons and place them before the trustees. A Dynamic Term Fund's duration is the fund manager's judgement, and that judgement can be wrong.
By borrower or type: seven categories
| Category | What it must hold | Assets (₹ crore) |
|---|---|---|
| Corporate Bond Fund | At least 80% in corporate bonds rated AA+ and above. | 1,73,720 |
| Credit Risk Fund | At least 65% in corporate bonds rated AA and below. AA+ bonds do not count. | 21,998 |
| Banking and PSU Debt Fund | At least 80% in debt of banks, public sector undertakings, public financial institutions and municipal bonds. | 75,289 |
| Gilt Fund; 10-year Constant Maturity Gilt Fund | At least 80% in government securities. The second keeps a portfolio Macaulay duration of 10 years. | 29,089; 4,067 |
| Floating Interest Rates Fund; Sectoral Fund | At least 65% in floating rate instruments. Sectoral: at least 80% in AA+ and above debt of one named sector. | 52,700; 584 |
Sources: SEBI Master Circular for Mutual Funds, 20 Mar 2026, para 3.8.2; AMFI Monthly Note, August 2026 (assets on 31 Aug 2026).
Trainer notes
These categories say who the borrower is or what kind of instrument is held; except for the 10-year gilt category they set no duration band, so a Gilt Fund or a Corporate Bond Fund can be short or long. Sectoral debt funds may be launched in five sectors: financial services, energy, infrastructure, housing and real estate. Floating rate exposure may be created with swaps. Ratings are explained in the credit risk deck.
The same rise in yields, three categories
THE SET-UP
₹1,00,000 in each of three funds.
Assumed portfolio durations: Liquid Fund 0.1 year, Short Term Fund 2 years, Long Term Fund 8 years.
Yields on all their holdings rise by 0.50 percentage point in a day.
- Rule of thumb from the duration deck: change in value ≈ −duration × change in yield.
- Liquid Fund: −0.1 × 0.50 = −0.05%. On ₹1,00,000 that is about ₹50.
- Short Term Fund: −2 × 0.50 = −1.0%, about ₹1,000. Long Term Fund: −8 × 0.50 = −4.0%, about ₹4,000.
- If yields fell by 0.50 point instead, the same sums would be gains: about ₹50, ₹1,000 and ₹4,000.
Result: Same market move, very different effect on NAV. The category band sets the range of that effect.
Illustration with assumed figures: a rough estimate, before interest earned and expenses. Not a forecast.
Trainer notes
The durations are assumed values inside each category's rule: a Liquid Fund's holdings mature within 91 days, a Short Term Fund's duration is 1 to 3 years, a Long Term Fund's is above 7 years. Using Macaulay duration in the rule gives a slightly high estimate; the duration deck explains modified duration. Yields on short and long paper rarely move by the same amount on the same day.
Where the money sits
Open-ended debt schemes' net assets, 31 August 2026. Most money is in the shortest categories.
- ALL DEBT SCHEMES
- ₹19.33 lakh cr₹19,33,476 crore across the 17 categories on 31 August 2026.
- THREE SHORTEST BY MATURITY
- 59.4%₹11,48,720 crore in Overnight, Liquid and Money Market Funds. Liquid Funds alone: 37.1%.
- LONG TERM FUNDS
- 0.6%₹11,435 crore. The Sectoral Fund category, new in 2026, held ₹584 crore.
Source: AMFI Monthly Note, August 2026 (month-end assets of income/debt-oriented schemes). Shares computed from the category figures.
Trainer notes
These shares are industry totals, not a guide to what individuals hold. The figures are industry assets, not market prices, and AMFI publishes them monthly; use the latest note. Shares: (90,798 + 7,18,026 + 3,39,896) ÷ 19,33,476 = 59.4%; 7,18,026 ÷ 19,33,476 = 37.1%; 11,435 ÷ 19,33,476 = 0.6%.
How the gains are taxed now
Here a debt fund means a 'specified mutual fund': more than 65% in debt and money market instruments (test in force from FY 2025-26).
| Case | Treatment | Rate |
|---|---|---|
| Units bought on or after 1 April 2023 | The gain is treated as short-term, whatever the holding period. No indexation. | Investor's slab rate |
| Units bought before 1 April 2023, sold now | Outside the slab-rate rule. Long-term if held more than 24 months (12 if listed). No indexation. | 12.5% on long-term gains |
| Income distributed under the IDCW option | Added to the investor's income. For residents, tax is deducted at source at 10% above ₹10,000 a year from one fund house. | Investor's slab rate |
Source: Income-tax law on 'specified mutual funds' (Finance Acts 2023-2025), via a 2026-27 fund-house tax reckoner (secondary). See capital gains deck.
Trainer notes
Interest on a bank deposit is also taxed at the investor's slab rate, so the rate advantage that long-held debt funds once had over deposits ended for units bought from 1 April 2023. What remains different is timing: a fund's gain is taxed in the year the units are redeemed. Rates are before surcharge and cess. We explain the rule and do not compute a client's tax; the capital gains deck has the detail.
If you learnt this from older material
Two things changed: the tax rule in 2023 and 2024, and the category list in 2026.
What older material says
- 16 debt categories, with names such as Low Duration and Dynamic Bond (2017).
- Held for over 36 months, gains are long-term: 20% with indexation.
- Move into long-term debt funds when rates are about to fall.
What holds now
- 17 categories, with names such as Ultra Short to Short Term and Dynamic Term (2026).
- Units bought from 1 April 2023: slab rate, whatever the holding period.
- That is a forecast. Longer duration gains more if yields fall and loses more if they rise.
Sources: SEBI circular, 6 Oct 2017; Master Circular, 20 Mar 2026, paras 3.8.2, 3.8.9; income-tax rules on specified mutual funds (see capital gains deck).
Trainer notes
The 6 to 12 month band kept its rule and changed its name, from Low Duration to Ultra Short to Short Term; Dynamic Bond became Dynamic Term; the Sectoral Fund was added as the 17th category. Old names still appear in articles, old statements and conversation, so know both. On the third row: we explain how duration works and do not say when to move between categories.
Four things people get wrong
Misconception'Debt funds cannot fall.'
What is trueNAV falls when yields rise or when a bond is marked down. The longer the duration, the larger the move. Returns are not assured.
Misconception'A Gilt Fund carries no risk.'
What is trueRBI: government securities carry practically no default risk, but prices move with yields. A Gilt Fund has no duration band.
Misconception'A Liquid Fund is a savings account.'
What is trueIt is a mutual fund scheme with a daily NAV. An exit load applies to money taken out within 7 calendar days.
Misconception'The category tells me the credit quality.'
What is trueOnly some do. Duration-based categories set no rating floor. The Potential Risk Class shows the most credit risk a scheme may take.
Trainer notes
On the fourth point: every debt scheme sits in one cell of SEBI's nine-cell Potential Risk Class matrix, covered in the credit risk deck. The category and the cell together describe the limits; the factsheet shows what the scheme holds today, including its Macaulay duration, yield to maturity and ratings. A portfolio's yield to maturity is not a promised return.
Check yourself
Question 1: A scheme must keep its portfolio Macaulay duration between 6 and 12 months. What is its SEBI category now, and what was the 2017 name?
Answer: Ultra Short to Short Term Fund. Under the 2017 categorisation the same band was called Low Duration Fund.Question 2: A Corporate Bond Fund and a Credit Risk Fund both hold company bonds. What must each hold?
Answer: Corporate Bond Fund: at least 80% in corporate bonds rated AA+ and above. Credit Risk Fund: at least 65% in corporate bonds rated AA and below, with AA+ bonds not counting.Question 3: A client bought units of a Short Term Fund in January 2024 and redeems them in October 2026 at a gain. Is the gain long-term, and how is it taxed?
Answer: No. The units were bought after 1 April 2023, so the gain is treated as short-term whatever the holding period and is taxed at the client's slab rate, without indexation.
Sources and disclaimer
Sources for the figures in this explainer
- Debt categories (para 3.8.2), compliance by 26 Aug 2026 (para 3.8.9), liquid fund exit load (5.6.5), Potential Risk Class (para 6.18): SEBI Master Circular for Mutual Funds, 20 Mar 2026.
- Net assets by category on 31 August 2026: AMFI Monthly Note, August 2026. Group totals and percentage shares are computed from those figures.
- 2017 category names and the count of 16: SEBI circular 'Categorization and Rationalization of Mutual Fund Schemes', 6 October 2017.
- Tax on debt fund units and income distributions: income-tax provisions on 'specified mutual funds', as summarised in a fund-house tax reckoner for 2026-27 (secondary).
- Government securities and default risk: Reserve Bank of India, FAQs 'Government Securities Market in India'.
- The worked example uses assumed durations and an assumed change in yields. It is an illustration, not an estimate for any actual scheme.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).