When you buy a unit of a debt fund, it implies that you have lent money to either the Government or a corporate. Here’s how. When these bodies are in need of money, they issue bonds and other fixed-income instruments with a fixed maturity
period and a fixed interest rate. These securities are bought by investors like you, and the money you pay is used by these bodies to meet their short- or long-term liquidity requirements.
These bonds are then either held till maturity or traded in the market as per fund manager decision & in line with the investment objective of the fund. Now, like any other lending/borrowing transaction, even a debt
fund purchase can carry risks. Because at the end, it is an interest-bearing security which is being traded in the market. There are micro/macro-economic factors affecting the debt funds, the interest rate fluctuations, the possibilities
of the abovesaid bodies not being able to repay the loans or the securities losing liquidity in the market for buying/selling. Factors can be many, but what you need to look at, as an investor, is whether the risk-reward ratio
working for you, i.e. whether the risk of debt funds is worth the returns you will get. Also, of course, it should match your risk appetite as well.