Debt funds generate returns by lending money to corporates and the government by buying their debt papers. These funds are classified into different categories based on their lending period and credit quality of the papers.
Types of Debt funds:
Money Market Funds
These funds generate returns by lending to companies or governments for up to 1 year.
Corporate Bond Funds
These funds earn returns by lending mostly (at least 80%) to companies with the highest-rated debt papers.
Overnight funds
These funds earn their returns by lending to companies or governments for one business day.
Liquid Funds
These funds generate their returns by lending to companies or governments for up to 91 days.