Looking to invest in debt funds for a 1-3 year horizon? Expert shares 4 categories you can consider

If you're planning to invest in debt mutual funds for the next one to three years, keeping things simple may be the best strategy.

In a recent post on X, Sanjay Kathuria shared insights from an episode of the Sanjay Kathuria Podcast featuring Kirttan Shah, Founder & CEO of Truvanta Wealth.

The discussion centred on the debt fund categories that may be most suitable for investors looking to park money for one to three years.

Sharing the key takeaway from the discussion, Kathuria wrote, “For a 1-3 year horizon, there are really only 4 categories of debt worth looking at. Short duration funds, dynamic bond funds, corporate bond funds, and banking and PSU funds.”

As per SEBI’s categorisation norms, short duration funds invest in debt and money market instruments such that the portfolio’s Macaulay duration remains between one and three years. They are designed for investors with a similar investment horizon and limit the interest rate risk as compared to the long duration funds.

Unlike other debt funds, dynamic bond funds do not have a fixed maturity profile. Fund managers actively adjust the portfolio's duration depending on the interest rate outlook.

These funds must invest at least 80% of their total assets in highest-rated corporate bonds (AA+ and above). Kathuria also highlighted that “corporate bond funds are interesting because 80% of the money legally has to sit in triple-A rated bonds, the safest category there is. The fund manager isn't even allowed to go lower for that 80%.”

These funds invest at least 80% of their assets in debt instruments issued by banks, Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs) and municipal bonds. Since the underlying issuers are generally considered financially stronger, these funds typically carry relatively lower credit risk.

He further noted, “Across every debt fund category in India, there's only one where fund managers are actually allowed to take real credit risk on purpose. It's literally called credit risk fund. Everywhere else, they stay as close to triple-A as possible.”

As per SEBI's categorisation norms, credit risk funds are required to invest at least 65% of their assets in corporate bonds rated AA and below. Unlike most other debt fund categories that primarily invest in higher-rated securities, these funds can take exposure to lower-rated bonds in an attempt to earn higher yields.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

Sheetal Goel is a Content Producer at Livemint, where she covers corporate developments, personal finance, business trends, markets, and SEBI-related updates. She focuses on simplifying complex financial concepts and presenting them in a clear, reader-friendly manner, thereby helping audiences better understand investment trends, personal finance, and market developments. Her writing focuses on making finance more accessible to everyday readers while maintaining clarity, accuracy, and relevance. <br><br> She holds a degree in Economics (Hons.) along with an MBA in Finance, which has helped her develop a strong foundation in financial analysis, market understanding, and business reporting. Before joining journalism, she worked with finance and broking firms, where she closely followed market developments, investment strategies, and evolving industry trends. This practical exposure strengthened her understanding of financial markets. She has also written content across multiple formats and platforms, including YouTube, LinkedIn, and Instagram. <br><br> Over time, she has developed expertise in covering market-linked stories, investor-focused topics, and regulatory updates in a simplified yet informative style. She also enjoys reading and listening to Hindi poetry, reflecting her appreciation for literature ...