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 Content Editor

Welcome to the world of Debt Mutual Funds!

Also known as fixed-income funds, debt mutual funds aim to provide you with stable returns at a relatively lower risk than equity-related investments. But what are debt funds and are they suitable for you? Let us find out!

What are Debt Mutual Funds?

Debt mutual funds invest in debt instruments/securities like bonds (corporate and Government), money market instruments, treasury bills etc.

Simply put, when you invest in a debt instrument, you are lending money to a corporate or the Government directly. In return, they issue a security which generally has a fixed coupon (interest rate). These securities are traded in the debt market, similar to how stocks are traded in the stock market. These are the securities debt funds invest in. Each security like a bond comes with a coupon rate, face value and maturity period. For example, a company can issue bonds of face value Rs 100, at a coupon rate of 6% for a maturity period of 5 years. Till 5 years, you will get 6% returns annually, and at the end of 5 years, you will get your principal amount back.

You may wonder, how safe are debt funds? Well, debt mutual funds are not risk-free. Any investment that is entirely risk-free may not have the potential to generate higher than nominal returns- that is the risk-return trade-off. But debt mutual funds are relatively safer than equity mutual funds. If you are a risk-averse investor wanting to get better returns than the traditional saving instruments with lower volatility, then debt funds may help you. The best debt funds for you will depend on the goals that you wish to achieve with them. Click here to know more about how to link your debt funds to your life goals.

Benefits of investing in Debt Mutual Funds

Over a period of years, both long-term and short-term investors have recognized the benefits of debt funds in their portfolios. They help you achieve a more balanced portfolio with relatively lower volatility. You can aim to benefit from debt funds on account of liquidity, relative safety, tax efficiency and returns.

Let us see the benefits of Debt Mutual Funds-


There are no lock-in periods or short-term volatility associated with debt funds that can prevent you from redeeming your investment. If you have excess cash, you can pick any short term debt funds of your choice to park your money. It can work as a great emergency fund too.

portfolio risk

For safety from market risk between debt funds vs equity funds, the former scores over the latter. Hence, debt funds may provide the stability that a pure equity portfolio may otherwise lack. If you strategically allocate a part of your portfolio to the short term debt funds, you are more likely to get better riskadjusted returns.


There are many types of debt funds available for you to choose from based on your need from the fund. While the shorter duration funds may help to provide relatively stable debt fund returns, the longer duration funds may suit you if you are comfortable with relatively higher volatility. In this spectrum of debt funds, you are sure to find the ones that help you meet your various goals.


Debt funds provide you with an opportunity to enter markets and investment vehicles that you may not otherwise have access to or expertise to enter. The fund managers of debt mutual funds are experts in their fields and aim to provide you with capital appreciation at a relatively lower risk.

For new

When you are making a switch from the traditional investments to mutual funds, debt funds can prove to be a safer and more palatable choice owing to the stability of returns and lesser risk involved.


Just like the traditional investments, debt fund returns too, are taxable when you redeem your investment. This tax is known as the capital gains tax. But the indexation benefit in debt mutual funds makes your tax-adjusted returns more favourable. The debt mutual funds tax benefits make them a better choice over the traditional investment vehicles.

Sounds interesting? Click here to know more about the benefits of debt mutual funds.

Who should invest in Debt Funds?

Creation of long-term wealth

Your long-term goals can be achieved by investing in medium/long-term debt funds. For investors who have a relatively lower risk appetite and are wary of investing in equity, these debt funds provide a relatively safe vehicle to map your goals to.

Investors who want to fulfil short/mid-term goals

If you have a short-term or a mid-term goal like buying a car or even your kid’s annual education fee, debt funds can prove to be favourable because of the relatively stable returns as compared to equity and also, the opportunity to earn modest returns.

Investors who want to create an emergency fund

The primary requirement for an emergency fund is it being liquid, which is fulfilled by debt funds. Through debt funds, the investors can also aim for potentially better returns compared to traditional saving instruments & that too with relatively less risk than equity.

Investors who want to systematically invest their lumpsum amounts

If you have a lump sum amount to invest in equity funds but are not sure whether the market timing is ideal for it, you can park your funds in a debt fund and initiate a systematic transfer plan to the equity fund. This provides you with the benefits of systematic investment.

Conservative or New mutual fund investors

Investors with a low-risk appetite may find debt funds less risky than equity-related investments and hence, more favourable. Similarly, new mutual fund investors may like the fact that debt funds are flexible, liquid, and offer more stable returns vis-Ã -vis equity.

Read more about Who should invest in Debt Funds Here

Types of debt funds

How to choose Debt Funds?

Out of the numerous categories and a number of debt funds available in India, how do you choose the best debt funds for investment? A look at the risk-return mix of the fund can help you decide which debt funds to invest in. You can pick the right debt fund by keeping below factors in mind

What is the duration of your investment?

Higher the fund’s duration, higher will be the sensitivity to the interest rates and probable fluctuations in the returns. Firstly, figure out how long do you want to stay invested for. A debt fund that is suitable for a 3-5-year investment will carry different risks than the one that is an overnight fund.

Check the risk you want to take up

Debt funds like the credit risk fund carry a higher credit risk. Different type of debt funds may have different credit risk profiles. Along with the duration, also determine the amount of credit risk you are comfortable with. In the chase of returns, at times, investors tend to overlook the risks. Endeavour to look at any debt fund in its totality before you decide to invest.

Once the above two aspects are sorted, you can look at the various categories of debt funds and pick the ones that closely match your financial goals, investment horizon and risk appetite. To know how to link your goals to debt mutual funds, click here.

How to invest in debt funds?

To invest in debt funds Here

How do debt mutual funds work?

Debt funds buy the debt securities at a certain price. When you invest in a debt security, the borrower or the entity issuing the debt security fixes the interest and the maturity period. Hence, they are called fixed-income securities. Apart from this fixed interest, debt funds also earn through the change in interest rates. Interest rates and bond prices are inversely related, and the interest rate fluctuation causes the bond price to go up and down, thereby resulting in capital appreciation/depreciation. The types of bonds held by a debt mutual fund decide the extent of earning via fixed interest and capital gains/losses. This is how debt funds work.

Debt funds can manage returns by investing in securities of varying credit ratings. The credit rating mainly specifies the ability of the borrower to pay the loan back. The bonds of higher credit rating are safer than the lower credit rating, but the latter have higher coupon rates and thus, possibilities of higher returns. Here is where the fund managers play a very important role. They make well-researched decisions based on their expertise to maximize the returns from interest rate movements and credit risk calls.


Relatively stable income/returns as compared to equity, more liquidity, less volatility, and portfolio diversification are some of the many benefits of investing in debt funds. The right debt fund is a careful choice that needs to be made, keeping the whole portfolio in mind. If the right selection is made, it can help you with capital appreciation and modest returns over a period of time.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.

Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully

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