The new categorisation of mutual funds by SEBI aims at defining them to be very identical to their names. Mutual fund schemes are categorized according to Macaulay duration and credit quality of the bond. Earlier, funds like short-term income funds or long-term income funds with a maturity of 3 and 10 years did not define the interest rate risk attached to them. Because the short-term fund, let\u2019s say, could include a mutual fund with a maturity of 3 years as well as a mutual fund with a duration of 1 year. It has been changed to a very specific definition of duration. \u201cPrior to the recent categorization process, most of the debt funds did not have duration bands or credit limitations. So the fund managers had full flexibility to manage funds in terms of duration and credit profile depending on the fund positioning in the market. With the new categorization the fund manager has to manage the fund within the defined duration bands or credit limits,\u201d says Avnish Jain, Head-fixed income, Canara Robeco Mutual Fund. ALSO READ: How to factor in returns in mutual fund investment Keeping this specification in mind, here is a sneak-peep into the 16 categories of the debt mutual funds: 1) Overnight funds- With the maturity of just one day, this open-ended debt scheme invests in overnight securities. 2) Liquid Funds- It\u2019s a low duration fund with a portfolio maturity of lesser than 91 days. A better alternative to savings accounts with a potential to offer higher post-tax returns, it invests in highly liquid money market instruments like Treasury bills, Commercial paper, Certificate of deposits and debt securities. 3) Ultra short-term bond funds- Low duration funds with maturity varying between 3 months to six months. It offers a slightly better return than liquid funds. 4) Low duration fund- This open-ended schemes invest in instruments with a duration of ranging from 6 months and 12 months. It invests in debt and money market instruments. ALSO READ: 10 insights from recent SEBI re-categorisation of mutual funds 5) Money market funds- This open-ended debt fund invests in money market instruments with a maturity up to one year. The money market instruments are used by corporates and governments to raise the money for a period which is typically less than a year. 6) Short term Income Funds- The portfolio funds where the maturity ranges from one to three years. One can benefit from them in a rising interest rate scenario. The portfolio consists of investment in debt, money market and government securities. 7) Medium duration funds- This open-ended fund have a duration of ranging between three years and four years. The portfolio consists of investment in debt, money market and government securities. 8) Medium to long duration funds- This open-ended scheme invests in schemes with a duration of ranging from four to seven years. 9) Long duration Income Funds- The portfolio maturity lies between seven to 10 years. The interest rate fall benefits as the bond prices (NAV) and interest rates are inversely correlated. 10) Floating rate Funds- There is a requirement to at least invest 65 per cent of total assets in floating rate instruments. Floating rate instruments are generally linked to MIBOR. The interest rate is reset periodically based on the interest rate movement. 11) Gilt Funds- It is a medium to long duration funds with maturity between 3 to 20 years and negligible credit risk. It does not carry credit risk but only interest rate risk. Minimum 80 per cent of total assets needs to be invested in G-secs i.e Government securities. 12) Gilt Funds with 10 years constant duration- Gilt funds mean " Government securities". This fund invests in government securities with a maturity period of exact 10 years. ALSO READ: Millenials use your parents to reduce your tax liability 13) Corporate Bond funds- Unlike credit risk funds, these open-ended schemes are required to invest in corporate bonds rated AA+ and higher. 80% of the total assets are required to be invested in highly rated corporate bonds. 14) Credit risk fund- It purchases bonds in lower-rated bonds to generate higher returns. It is for investors with a large risk appetite. It has to invest 65 per cent of the total assets in corporate bonds which are at AA rating or below that. 15) Dynamic bond funds- It reduces the interest rate risk as there is a flexibility to alter the portfolio maturity according to the interest rate scenario. Maturity is longer when interest rates fall and shorter when interest rates rise. 16) Banking and PSU Funds- This fund inherently needs to invest in debt instruments of banks, public sector undertakings and public financial institutions.