Who should invest in different types of debt funds

Ultra Short Term Debt Funds: Investors who usually have a large balance lying idle in their savings account can earn higher returns by investing in liquid or ultra short term debt funds. You can park your surplus cash in liquid fund for 3 to 6 months and make withdrawals at any time. If you want to park your cash for a longer period, say 6 to 12 months, you should invest in ultra short term debt funds (previously known liquid plus funds). Ultra short term debt funds give higher returns than liquid funds.

Short term debt funds: Short term debt funds are suitable for investors with low risk tolerance, looking for stable returns. Investors should look at the yield to maturity of the fund portfolio to get a sense of expected returns. Investors should have a one year investment horizon for short term debt funds.

Long Term debt Funds: If you have moderate to high risk tolerance level and are looking for both income and capital appreciation in different interest rate scenarios, you can invest in long term debt or income funds. If you are looking for capital appreciation in a declining interest rate environment, you can also invest in Long Term Gilt Funds. You should have a long investment horizon of at least 3 years for long term debt funds.