Debt refers to borrowings by Government of India, Public Sector Organizations and the Private sector companies to raise capital for their long term and short term needs. Debt instruments are segregated as Government debt and Private sector debt. Also as short term and long term debt.
Indian Government borrows money every year from the public through banks and financial institutions to meet its annual expenditure for economic growth and development. Government is the largest borrower in the country. Various State Governments also borrow to certain extent from public.
Government borrowing of less than 1 year maturity is called call money market. This is issued in the form of Treasury Bills. T bills can have varying short term maturity periods like 91 days or 182 days or 364 days at the most. Private sector borrowings of short term nature are in the form of commercial paper.
Government borrowing of more than 1 year maturity is called Government Securities or G Secs or Gilts. This can be for maturity periods ranging from 1 year to 20 years. Government borrowings are guaranteed to be paid back by the central government and carry zero default risk. Hence they have low coupon. They also act as benchmark for private sector borrowings.
Private sector debt can be in the form of Debentures, Corporate Fixed Deposits. Public sector debt is in the form of Bonds. Credit Rating agencies like CRISIL, ICRA, Fitch etc. rate private sector borrowings as per their credit quality (AAA or AA or B etc.).
Banks and Financial Institutions invest in government and private sector debt. Banks are required by RBI to maintain a certain portion of their deposits in Government Securities and T bills. The percentage of deposits which banks are required to maintain in Gsecs or T bills is regulated by RBI to increase or decrease liquidity in the economy and control inflation and boost economic development.
Mutual funds and Insurance companies also invest in Government debt. Mutual funds which invest in debt of less the 1 year maturity (Government or private sector) are called Money Market Mutual Funds. Mutual funds which invest in more than 1 year maturity are called Debt funds. Money markets mutual funds offer low returns and are intended for those who want to park short term funds.
Debt funds are for longer maturity periods, although they can be liquidated at any time if it is an open ended scheme or through stock exchange for close ended schemes. Mutual funds are not very actively traded at stock exchanges and one may find it difficult to get a good value or buyer. Update: Dividend Distribution Tax, mentioned below as it stood when this article was written, was abolished from FY 2020-21 onward. Dividends distributed by debt-based mutual funds are now taxed directly in the hands of the investor at their income tax slab rate, rather than the fund paying DDT before distribution.
For more information about the types of Debt instruments, please visit:
http://www.fimmda.org/
Related reading: how to choose debt-based mutual funds, and mutual fund taxation explained.
