When it comes to Mutual Funds, some people think that investing in Mutual Funds is related to equity markets only. Mutual Funds also invest in Debt Instruments to enhance the returns when the equity markets do not perform well. There are various types of Debt Funds offered by many Mutual Funds suitable for different types of purpose. Let us look at them in brief. Liquid Funds/Money Market Instruments Liquid Funds invest in money market instruments, treasury bills and short-term deposits which are highly liquid. The maturity term of these funds is very short ranging up to 91 days. Liquid Funds are more suitable for High Net worth Individuals and Corporate Companies as they can park their surplus and unused funds to gain some interest, prevailing in the market. The returns from these funds are lesser compared to other Debt Funds. Since these funds are highly liquid, they can be redeemed at any time. These funds help to gain from the current market interest rates and to lower the risk of interest rate fluctuations. Floating Rate Funds These funds invest in those securities with floating rate of interest. The interest rates of these funds are changing according to the interest rates prevailing in the debt market. These funds invest in bonds and debt instruments whose interest rates are fluctuating according to the interest rates in the market. These funds are suitable for those who want to park their funds for short-term. Investment in these funds helps to get better returns when the interest rates are increasing. Gilt Funds These funds invest in government securities and treasury bills issued by the Central and State governments. Since the government, issues these securities, investment in these funds are considered more secured. These funds are available for medium to long-term investments. Income Funds The aim of Income Funds is to generate regular income to the investors. These funds invest in those stocks of the companies, which pay regular dividends and in those securities, which pay high interest. Though these funds are called Income Funds, there is no assurance to the investors for regular income. Investors can get income whenever the funds perform better. Dynamic Bond Funds These funds invest in short-term securities when the interest rates are moving upwards and invest in long-term securities when the interest rates are going down. Since this is difficult for the investors to time the interest rates scenario from time to time. These funds help them by investing their money by timing the debt market and interest rates’ ups and down movements. Hybrid Funds These funds are also called Balanced Funds. These funds invest in both equity and debt instruments in varying proportion from time to time. The three types of funds in this category are Equity-oriented, Debt-oriented Conservative and Debt-oriented Aggressive. Equity-oriented Hybrid funds are eligible to be called ‘Equity Funds’ if they invest more than 60% of the money in equity for tax purpose. The long-term gain of equity funds are exempted from income tax. Capital Protection Funds Capital Protection Funds ensure the safety of the principal amount. At the same time, these funds earn some returns by investing in debt instruments. These funds help investors to secure their investments in volatile market conditions. These funds invest in secured debt instruments and equity as well but protect the principal value. Fixed Maturity Plans If there is an alternative to Bank Fixed Deposits, it is Fixed Maturity Plan. These funds are closed-ended funds. The funds give returns just higher than the returns provided by Bank Fixed Deposits. They give the tax benefit as well. Investment in these funds having tenure of minimum 365 days is eligible for indexation benefit. These funds are helpful for investors in the higher tax bracket.