SEBI's debt categories look like an arbitrary list of sixteen names. They are not. Most of them are one variable — how long the fund lends for — sliced into bands, and once you see the ladder the catalogue becomes navigable. This guide walks the rungs the short-end overnight/liquid/ultra-short guide stops before.
The ladder, rung by rung
Each category is defined by its Macaulay duration — a weighted average of when the fund's money comes back. Longer duration means more sensitivity to interest rates, in both directions.
- Low duration — 6 to 12 months. One step out from ultra-short. Still fundamentally a parking category.
- Money market — instruments maturing within a year, but restricted to money-market paper specifically (treasury bills, commercial paper, certificates of deposit). Defined by instrument type rather than by duration band, which is why it sits slightly outside the ladder's logic.
- Short duration — 1 to 3 years. The first rung where rate moves produce a visible NAV swing.
- Medium duration — 3 to 4 years.
- Medium to long duration — 4 to 7 years.
- Long duration — over 7 years. Maximum rate sensitivity; a genuine bet on falling rates, and a painful place to be when rates rise.
Floater funds sit off the ladder entirely and are worth knowing for exactly that reason. They hold predominantly floating-rate instruments, whose coupons reset as rates move. That resetting is what makes them structurally less rate-sensitive than a fixed-coupon fund of similar maturity — the one debt category designed to be comfortable in a rising-rate environment.
The rule the ladder exists to serve
Match duration to your horizon. A fund whose duration is close to how long you intend to stay is the one where rate moves have time to wash out — the same hold-to-maturity logic that target maturity funds formalise with an actual date.
Get it wrong in the obvious direction and the failure is sharp: money needed in eighteen months sitting in a long-duration fund is exposed to a rate cycle it has no time to ride out. Get it wrong in the other direction and the cost is quiet — years of accepting overnight yields on money that could have earned a term premium.
The two other risks do not disappear as you climb. Credit risk is a separate axis entirely — a short-duration fund holding weak paper is more dangerous than a long-duration gilt fund, which is the distinction duration and credit are not the same thing is built around, and which a frozen debt fund demonstrates the hard way. And cost matters disproportionately at every rung, because a debt fund's gross return is a few percent and the expense ratio is subtracted from it, not from an equity-sized number.
Choosing without predicting rates
Most retail investors should not be positioning on a rate view, for the same reason most should not be timing equities. Two defensible approaches:
Pick by horizon and stop. Short money in short funds, long money in long funds, and accept whatever the cycle does. This is the boring, correct default.
Delegate the call explicitly. A dynamic bond fund hires a manager to move along the ladder for you. That is a real service with a real fee and a mixed record; buy it knowingly, not by accident.
What you should not do is pick the category that returned most last year. In debt that is almost always the longest-duration one in a year rates fell — a fact about rates, not about the fund, and the purest form of recency bias available anywhere in investing.
⚠️ SEBI's duration bands and the taxation of debt funds have both been revised. Verify current definitions before relying on the numbers here — check the yield to maturity and duration in the fund's own factsheet.
Key takeaway
Most debt categories are one variable — lending duration — cut into bands, from low duration at six months to long duration past seven years, with floater funds sitting off the ladder because their coupons reset. Match the band to your horizon and rate moves wash out; mismatch it and you have taken a rate bet you did not intend. Credit quality is a separate axis that longer duration does not improve, and expense ratio bites harder here than anywhere else in a fund portfolio.
Terms used here
See the funds
More in Module 3 — Categories and asset classes
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