What is a Debt Mutual Fund?

Debt funds are also known as Fixed Income Funds or Bond Funds. A debt mutual fund invests in fixed-income instruments. These fixed-income instruments may include debt securities, money market instruments, government bonds, corporate bonds etc.

Debt mutual funds may be a suitable option for short-term, medium-term and long-term goals and may have a lower risk-level. Debt mutual fund returns may be relatively lower, however these funds aim to potentially offer optimal returns. Several types of debt mutual funds may be suitable for different goals and requirements. These debt mutual funds may vary in their maturity period and risk level.

• Overnight Fund:

  These funds have a maturity of 1 day. They are low risk as the credit risk and interest rate is low. However, overnight debt mutual fund returns are low. Overnight funds may be suitable for investors looking to invest in money market and debt instruments for the short term.

 
• Liquid Fund:

  Liquid funds may be suitable for investors seeking highly liquid investments for the short term. These funds have a maturity period of upto 91 days.

 
• Ultra-Short Term Fund:

  The Macaulay duration of this debt mutual fund is between 3 to 6 months, and it invests in debt and money market instruments. Ultra-Short Term Funds may be suitable for investors looking for short-term investments with low risk.

 
• Low Duration Fund:

  These funds mature between 6 to 12 months. They may be suitable for investors looking to generate short-term optimal returns with high liquidity.

 
• Money Market Fund:

  Money manager funds or money market funds are a short-term debt mutual fund. They invest in securities with low-interest rate risk and relatively low credit risk. They may be suitable for investors with a short-term investment horizon.

 
• Corporate Bond Fund:

  These debt mutual funds invest a large portion of their total assets, at least 80% in corporate bonds and are relatively low-risk. These may be suitable for investors looking to make investments in high-quality corporate bonds.

 
• Floater Fund:

  These debt mutual funds are low risk and have a low-interest rate. They may be suitable for investors looking to invest in predominantly floating-rate instruments and potentially generate short-term optimal returns.

 
• Banking and PSU Fund:

  This debt fund scheme invests in banking institutions and other public sector companies. They may be suitable for investors with a moderate risk appetite.

 
• Short Duration Fund:

  The duration of these debt mutual funds is one to three years. They may be suitable for low-risk investors looking to potentially generate returns over the short to medium term.

 
• Medium Duration Fund:

  These debt mutual funds mature between three and four years. They may be suitable for investors with a moderate risk-appetite seeking optimal returns over the medium term.

 
• Medium to Long Duration Fund:

  These funds mature between four and seven years. They may be suitable for investors seeking a moderately risky investment for the long term.

 
• Gilt Fund:

  These funds invest in government securities with varying maturity periods. These securities have a relatively high interest rate risk and low credit risk. Government securities funds may be suitable for investors with a moderate risk-appetite.

 
• Dynamic Bond Fund:

  This debt mutual fund attempts to capitalise on market cycles by undertaking an active investment strategy. The portfolio changes dynamically to benefit from rising and falling interest rates.

 
• Credit Risk Fund:

  This debt mutual fund invests in low-quality debt securities (AA-rated bonds). Credit risk funds may be considered a high-risk-return investment and may be suitable for investors with a high-risk appetite seeking medium to long-term investments.

 

Taxation of debt mutual funds depends on their holding period. Units held for three years are subject to STCG tax. Gains are added to the investors income and taxed according to their tax bracket. LTCG tax is levied on units held for more than three years. These units are taxed at 20% with indexation benefits.

Who Should Invest In Debt Funds?

Generally, most debt funds have a relatively lower risk-appetite. They may be suitable for risk-averse investors. Debt mutual fund returns may vary depending on the type of fund. Short duration funds are likely to offer lower returns.

Investors must choose debt mutual funds depending on their goals. In general, investors who are risk-averse but want regular income may potentially benefit by investing in debt funds. Debt mutual funds may be relatively less volatile and, hence less risky. However, all mutual funds are subject to market risks, investors must carefully understand the scheme and its risks before investing.

FAQs

• What is the meaning of debt mutual funds?

  Debt mutual funds invest in fixed-income instruments. These fixed-income instruments include government bonds, corporate bonds, money market instruments etc.

 
• How to invest in debt funds?

  You can visit the fund's online page and choose among the various types of available debt funds according to your goals. Enter PAN details and fill the KYC requirements.

 
• Which debt fund is the best?

  Identifying a suitable debt fund depends on the investor`s requirements and risk tolerance. Most debt funds are low-risk and may be suitable for risk-averse investors. Debt mutual funds returns may be relatively low and may not be suitable for investors seeking high-returns.

 
• How risky are debt mutual funds?

  Although debt funds are generally considered low risk they do have some risks. They are subject to credit, interest rate, inflation, and reinvestment risks.

 
• Are debt mutual funds tax-free?

  No, debt mutual funds are not tax free. Units held for three years are subject to STCG. Short term capital gains are added to an investors income and taxed according to their income tax slab. LTCG tax is levied at 20% for units held for over three years.