What Is Debt Fund? Types, Risk, Return, And Top Performing Debt Funds

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Investors need to have moderately high to high risk appetites with longer investment tenures for equity funds investments. Since equity funds invest in shares and stocks, they carry higher risks compared to debt funds. Debt mutual funds have a lower risk attribute as they invest in fixed income instruments.However, debt funds are subject to interest rate movements. If there is a large movement of interest rates, then even debt funds (mainly long -term debt funds) can show large losses.

Strategy – Follow the life stage approach to investing while saving through mutual funds for retirement needs. As you age, keep balancing the allocation between equity and debt. So matching your investment horizon with the average maturity is always a good idea. But remember, an average maturity of say 4 years doesn’t necessarily mean that you have to hold it for 4 years.

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One needs to de-risk the portfolio when you are nearing your targets to ensure that the gains you have earned are not wiped out. In other words, as you near your target, start shifting from equity to debt so as to secure your gains. For those planning to buy a home after 2-3 years, investing in a combination of both long- and short-term debt funds might be a good idea. Also, a debt fund can be used in the overall portfolio for diversification across asset classes. Debt Funds can also be used for portfolio de-risking when you are nearing your financial goals.

Debt funds are also an alternative investment for fixed deposits and savings bank account. Short-term debt funds primarily invest in debt instruments with shorter maturity or duration. These primarily consist of debt and money market instruments and government securities. The investment horizon of these funds is longer than those of liquid funds, but shorter than those of medium-term income funds.

The borrower raises money by issuing bonds while the investor looks to earn assured fixed income by investing in such bonds. The main distinguishing factor between equity vs debt funds is risk e.g. equity has a higher risk profile compared to debt. Investors should understand that risk and return are directly related, in other words, you have to take more risk to get higher returns. At the same time, investors should also understand the linkage between risk and investment tenure, i.e. if you are taking more risk, you should have longer investment tenures. Typically, gilt funds and corporate bond funds carry a fair bit of interest rate risk, but floater funds do not. This is because in securities with a floating rate of interest, the rate is regularly adjusted according to the benchmark rates.

We hope this article provided you with all the information about debt mutual funds. Short term capital gain is taxed as per the income tax slab of the investor and long term capital fund is taxed at 20% after indexation. The maturity period of short term funds and ultra short term funds ranges from 1 year up to 3 years. There are different type of debt funds available in the market today. There are plenty of options for investors with varied preferences. Some of the most popular type of debt funds are discussed here.

So, the value of the old bond goes up since they are now more valuable to the investor. A credit rating is provided to all the debt instruments and bonds. This rating reflects the ability of the instrument or bond to repay the amount invested.

Top 10 Debt Funds with Highest Return in 2023

Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor’s degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication . You have the flexibility to invest in debt funds through a lump sum whenever you have an additional amount of money. Alternatively, you can invest in small amounts through SIPs , or transfer units from one fund to another through STPs . Inflation risk is the risk of the rupee losing value due to price rise. But if the rate of inflation grows faster than the fixed amount of income, the investor loses purchasing power.

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Mutual funds offer a wide range of investment solutions for different investment needs, tenures and risk appetites. Different investors have different financial goals and risk appetites depending upon their stages of life and financial situations. Also, one investor can have multiple financial goals at any point of time.

Who Should Invest in Debt Mutual Funds?

They are a type of mutual fund whose units can be bought or sold only during specific time periods, which are pre-determined by the fund house. They resemble closed ended funds in a way, as they do not permit regular buying and selling and remain closed for the time interval specified by the fund. On the other hand, they resemble open end funds as well because they open for subscription frequently and do not remain closed for long periods. Thus, they combine the features of both open ended and closed ended funds. Investors in high tax bracket should invest in growth option and hold it for more than three years. So, high tax slab investors are better off investing in growth option.

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They play an important role in helping one build the biggest asset of life—a home of your own. Liquid funds are the least volatile as their maturity is in days and at the other extreme there are income funds, where the average maturity is in multiple of years. The higher the average maturity, the greater the uncertainty in the short term, which is what results in greater volatility.

Aggressive example of debt fundors may go for Credit Risk Funds which invest in low-rated securities. These funds generate relatively higher returns while taking higher credit risk. Risk averse investors may create wealth by investing in corporate bond funds which invest in high quality securities. Besides, liquid funds are ideal short term investments for creating an emergency fund.

An investor can also take advantage of changing interest rates and could generate income by choosing the right fund matching his risk appetite and investment horizon. Medium Duration Fund invests in debt securities and money market instruments such that the Macaulay Duration of the portfolio is between 3-4 years. Short Duration Fund invests in debt securities and money market instruments such that the Macaulay Duration of the portfolio is between 1-3 years. Since debt funds are highly liquid, you can consider investing your surplus money in these funds and earn much higher returns than a regular savings bank account. Debt funds aim at optimising returns by diversifying the portfolio by investing across a variety of securities. It is because of this reason that debt funds are suitable for conservative investors.

  • Credit Risk Fund – which invests a minimum of 65% of its investible corpus in corporate bonds having ratings below the highest quality corporate bonds.
  • Investors need to clearly take into consideration their risk profile including their tenor of investment and ability to tolerate losses before getting into debt funds.
  • Dynamic Bond Funds invest in debt securities of different maturity profiles.
  • They may provide a higher level of return than ultra-short-term and liquid funds but will be exposed to higher risks.

Select and https://1investing.in/ in the best debt funds for FREE with RankMF. But liquid funds which invest 100% in Treasury Bills are 100% safe. The fund’s NAV fell from Rs 1,564.30 to Rs 1,222.91 in one day. Since the fund had a small AUM and a compact portfolio, its over concentration to Yes Bank NCDs wiped off a major portion of investors’ wealth.

Average Maturity (Only Debt Funds)

The debt fund manager decides which debt instruments will be purchased and managed under a particular fund. This decision is based on the credit risk ratings of debt instruments available in the market. Unlike an equity mutual fund scheme, you always have a fair idea about what your mutual fund’s investment in your chosen debt fund, will fetch you at the time of its maturity. In other words, Interval funds allow redemption of Units only during STPs. Thus between two STPs they are akin to closed-ended schemes and therefore, compulsorily listed on Stock Exchanges.

  • It is a debt instrument where the issuer is obliged to pay interest along with principal amount at the time of maturity, to the holder of the bond.
  • Corporate bond funds are a great option when it comes to good return and low-risk type investment.
  • This option is considered to maintain an optimum balance of liquidity, safety, and yield.
  • Debt Mutual funds are a safe component of a diversified portfolio, which can cushion it from the losses arising from riskier investments like equity funds and commodities.

Funds having a lower average maturity are ideal for short-term holdings as they are well protected from the fluctuating interest rate movements. This fund predominantly invests in papers rated AA and below (excluding AA+ rated corporate bonds). Credit Risk Fund aims to earn higher returns by investing in papers which offer relatively higher interest rates. However, they carry credit risk compared to other debt funds. The performance of debt mutual funds are not influenced much by the market movements.


Income debt funds invest in debt securities with varying maturity periods, but mostly for the long term. The average maturity period of income funds is around 5-6 years. Income funds invest in government securities and corporate bonds, taking into account the changing interest rates. Debt mutual funds are mutual funds that invest in fixed income instruments. Debt mutual funds are like baskets that hold dozens or hundreds of individual securities (in this case, corporate bonds, govt. securities etc.). A Debt fund manager researches fixed income markets for the best bonds based upon the overall objective of the fund.

In the growth option of a mutual fund scheme, all profits made by the fund are reinvested into the scheme and no dividends are declared. Hence, the NAV increases over time and investor gets higher capital gains. Only those schemes which have been around for more than 2 years have made it to the list.

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