What is Debt Mutual Fund?

Mutual funds that invest in debt and money market instruments fall under the category of debt mutual funds. Products used in the money market and debt markets are a few examples commercial papers, certificates of deposits, treasury bills, non-convertible debentures, government bonds, and G-Secs.

Receiving income in the form of interest payments is the main goal of debt or money market instruments. Some debt funds may bring in capital gains for their investors. Bonds and fixed-income securities are where debt funds place their money to produce returns. Debt mutual funds are crucial for investors to include in their portfolios since they diversify the portfolio and shield it from stock market volatility.

However, some mutual fund Distributor (like fixed maturity plans) cannot be routed through the SIP technique. Investors can invest in debt mutual funds by lump sum investments or SIPs.

Debt mutual funds can be utilized as a day-capitalization vehicle or as a long-term investment vehicle. In general, it is advised to employ loan capital for projects with a lifespan of fewer than five years. The kind of debt fund an investor chooses will depend on their financial objectives, level of risk tolerance, and length of the investment. Debt mutual funds provide high liquidity, low to moderate risk, and the ability for investors to protect themselves against market volatility. When compared to bank deposits, investing in debt mutual funds has the potential to yield better returns.

Types of Debt Funds

Depending on the maturity length, risk profile, and investment goal of the client, investors can select from a variety of debt mutual fund kinds.

Overnight Fund

This fund makes investments in assets with a one-day maturity. Due to their short maturity periods, Overnight Funds have low credit and interest rate risk and are therefore seen as being rather stable.

Liquid Fund

Only debt and money market instruments with a residual maturity of up to 91 days are included in Liquid Fund investments. The underlying instruments are fairly liquid and could provide acceptable returns compared to more conventional routes. Some liquid investments additionally provide the option of instant redemption, which permits redemptions of up to 50,000 per investor each day and per plan.

Ultra-Short Duration Fund

Extremely little duration The Macaulay Duration of the portfolio, as determined by the fund’s investments in debt securities and money market instruments, is between 3 – 6 months.

Low Duration Fund

Low Duration Fund A low duration fund makes investments in debt securities and money market products to achieve a portfolio’s Macaulay Duration of 6 – 12 months or less.

Money Market Fund

A money market fund invests in securities with a maximum one-year maturity. This fund is a fantastic option for temporarily storing surplus funds. Due to its high level of relative liquidity and potential for higher returns than more conventional investment options, it can also be utilized as an emergency fund.

Short-Term Investments

The Macaulay Duration of the portfolio of investments made by Short Duration Fund, which invests in debt securities and money market instruments, ranges from 1-3 years.

Medium-Term Investment

The Macaulay Duration of the portfolio of investments made by the Medium Duration Fund, which invests in debt securities and money market instruments, is between 3-4 years.

Corporate Bond Fund

The majority of the corporate bonds that the Corporate Bond Fund invests in are rated AA+ and higher. It is a suitable choice for investors looking to invest in papers with reasonably low credit risk and a modest propensity for risk.

Credit Risk Fund

This fund primarily invests in securities with credit ratings of AA and lower (AA+ rated corporate bonds are not included). Credit Risk Fund invests in papers that have comparatively higher interest rates to increase returns. When compared to other debt funds, they do, however, contain credit risk.

Banking & PSU Fund

At least 80% of the assets in the Banking & PSU Fund are allocated to debt and money market instruments issued by banks, PSUs (public sector undertakings), public financial institutions, and municipal bodies.

Dynamic Bond Fund

Based on the current interest rates, dynamic bond funds invest in debt instruments with changing maturities. The portfolio is dynamically changed by the fund manager according to interest rates. These funds are a suitable choice for investors aiming to produce a consistent income over the medium term and who have a risk tolerance that is somewhat above average.

Gilt Funds

At least 80% of the assets in gilt funds are placed in government securities of various maturities. Given their exposure to sovereign papers and the low credit risk, they are regarded as one of the more stable assets. Due to this, risk-averse investors should consider gilt funds.

Note: Macaulay The weighted average period required to receive bond cash flows is known as duration. It calculates how long it will take for a bond investor to recoup their investment through periodic interest payments and principal repayments. Typically, it is expressed in years.

Who Should Invest in Debt Funds

Investors who desire predictable returns and have a low to moderate appetite for risk might choose debt funds.

– Debt funds are designed to increase the stability of the portfolio by reducing volatility brought on by changes in the market.

– To provide stable returns, debt mutual funds diversify the portfolio over a range of securities.

– By investing in debt mutual funds, investors may be able to achieve their financial objectives while also receiving favorable returns on their investments.

– Debt mutual fund investments may be redeemed at any moment by the needs of the investor.

Advantages of Debt Mutual Funds

The advantages of investing in debt mutual funds are listed below:

  1. Consolidation and variety

When compared to equities mutual funds, the returns from the fund’s investments in fixed-income instruments are stable. Debt mutual funds are a good option for those with low to moderate risk tolerance. Due to the diversification of the portfolio provided by debt funds, investment returns are stabilized.

Debt mutual funds may offer lower returns than other types of investments, but they would also offer more consistent and predictable returns.

  1. Hedge against volatility

Mutual funds that invest in debt may be an excellent way to protect assets against volatility. In comparison to other types of market-linked products, such as equities funds, debt funds are less risky and volatile. Investors that use debt mutual funds in their portfolios can control the risk present during erratic market situations.

  1. Increased liquidity

An alternative to bank fixed deposits is debt mutual funds. Fixed deposit investments have a lengthy withdrawal process and lock-in period. By investing in debt mutual funds, investors can take advantage of the advantages of extremely liquid investments. Investors may withdraw their money from their investments as needed, and the funds will be credited to their bank accounts the next day.

  1. Lower transaction costs

Comparing debt funds to equity and other mutual funds, they have lower transaction costs. Debt funds are not subject to TDS. Debt mutual funds, on the other hand, are taxed based on the length of the holding period and are categorized as either short-term or long-term capital gains.


It’s crucial to select debt mutual funds based on one’s time horizon for investing. Choosing alternative schemes based on one’s objectives and liabilities requires careful thought. There are numerous debt mutual funds available that can satisfy investors’ needs. Additionally, because debt funds are market-linked, investors should be aware that there are some risks associated with them and should take all of them into account before investing in debt mutual funds.

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