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What is a debt fund?

Debt funds are mutual funds which invest in fixed income securities such as bonds, money market instruments (treasury bills, government bonds, non-convertible debentures) or even a combination of the two.

A debt fund which invests in money market instruments is called a liquid fund. A liquid fund ensures that the principal amounts you have invested are safe. It also gives a decent return as its earnings are from interest.

Why invest in Debt Funds

Safer than Equity

Investments in debt funds are not affected by volatility in the stock market. This reduces risk in your investment.


Stable Returns

You get lesser but more stable returns, than equity. You replace volatility with stability. Debt funds are more liquid than fixed deposits.


You can invest small amounts regularly through the SIP route. Whenever you have extra money, you can invest it in debt funds.

Taxation Benefit

The profit you make in the long term is taxed with an indexation benefit. You save on your taxes.

Types of Debt Funds

Fixed Maturity Plans

Fixed maturity plans are closed ended and invest in debt which matches the term of the scheme.

Fixed maturity plans have tenures ranging from 3 months to 5 years. You must invest in a Fixed maturity plan which matches your financial goals.

Income Funds

Income funds invest in Government bonds, securities and even corporate debentures. They invest across a wide range of maturities. They invest in short term instruments of 1-2 years and also in long term instruments of 10-15 years.

Short Term Fund

They invest in debt such as bonds, commercial paper and certificates of deposit with a maturity of 3-6 months.

Taxation of Debt Schemes

Short term capital gains (gains under 3 years), are added to your taxable salary. Taxed as per income tax slab you fall under. Long term capital gains (gains over 3 years), are taxed at 20% with indexation.


Concepts & FAQ's Debt Funds

What is a Debt Mutual Fund?

Debt Mutual Funds are those funds in which the pool of money of the investors is invested in mainly in short-term or long-term bonds (Government or Corporate) etc. This is done to provide a fixed income. The main objective of a debt fund is preservation of capital and generation of income on a steady basis.

What are bonds?

Sometimes large organizations or even countries need money for various purposes. The solution is to raise money by issuing bonds to a public market. Thousands of investors then essentially provide or loan a portion of the capital needed. By purchasing bonds an investor becomes a creditor (i.e gives Debt) to the corporation or government for which he/she is entitled to a fixed interest after a certain period (maturity).

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What is the advantage of buying bonds (debt) over buying stocks (equity)?

The main advantage of being a creditor is that you have a higher claim on assets than shareholders. Therefore even in case of bankruptcy, a bondholder will get paid before a shareholder. Thefore buying a bond (debt) involves less risk than buying stocks (equity). However, the bondholder does not share the profits if a company does well.

For whom are Debt Mutual Funds suitable?

Bonds are known as fixed-income securities because the exact amount of cash one gets back if one holds the security until maturity is known. Debt Mutual Funds are suitable for conservative investors and retirees. It is also suitable for those investors who are looking for a certain return of their investment in a short period of time.

Frequently Asked Questions

What are Debt Markets and Debt Market Instruments?

Typically those instruments that have a maturity of more than a year are called debt market instruments. The main types are - Government Securities (G-secs or Gilts) Like T-bills, gilts are issued by RBI on behalf of the Government. These instruments form a part of the borrowing program approved by Parliament in the Finance Bill each year (Union Budget). Typically, they have a maturity ranging from 1 year to 20 years. Like T-Bills, Gilts are issued through the auction route but RBI can sell/buy securities in its Open Market Operations (OMO). OMOs include conducting repos as well and are used by RBI to manipulate short-term liquidity and thereby the interest rates to desired levels The other types of Government Securities are Inflation linked bonds Zero coupon bonds State Government Securities (State Loans)

What are debt funds?

Debt funds are those funds which invest a majority of their assets into fixed income bearing instruments such as bonds, debentures, government securities, certificates of deposit, commercial papers and other money market instruments. Debt funds are also called income funds as they normally provide a stable income to the investors, while minimizing the element of risk.

How can a fund's performance be tracked?

A fund's performance can be tracked by tracking its NAV. The NAVs are calculated usually on a daily basis and the fund's performance can either be measured against various benchmarks such as a stock market index like the Sensex, Nifty, BSE 200, etc.

What is NAV?

Net Asset Value (NAV) of a fund is the total market value of all the investments of the fund (minus its expenses) divided by the number of units outstanding, on that given day. Buying and selling of mutual funds, as well as its performance is based on its NAV.

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Debt Funds Articles

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What are Municipal Bonds? How to Buy Municipal Bonds in India?

29 January 2020, Wednesday    

The municipal bonds are an ideal way for ULBs to finance development projects and raise money quickly from the market. With the government introducing ambitious development projects for various cities, municipal bonds have helped the ULBs to bridge the funding shortfalls. Since these bonds come with ....

Who Should Invest in Low Risk Mutual Funds?

23 January 2020, Thursday    

What are Low Risk Mutual Funds? Mutual funds with low credit risk are called low risk mutual funds. These funds invest in government securities like infrastructure bonds, real estate and so on. The low risk feature of these mutual funds ensures they stay ahead of inflation. Majority of assets are ....

What are Fixed Maturity Plans? Who Should Invest in It?

18 January 2020, Saturday    

What are Fixed Maturity Plans? As the name suggests, fixed maturity plans (FMP) are those that invest in fixed income instruments (debt) and have a fixed maturity period. These are closed end mutual funds that invest in corporate bonds, government bonds, certificates of deposits (CD), money marke ....


Debt Funds News

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Cabinet approves launch of Bharat Bond ETF

Wednesday, December 4, 2019, 6:06 PM

The Cabinet today approved the launch of the Bharat Bond Exchange Traded Fund or ETF, which would be the first corporate bond ETF in the country. ETFs invest in a basket of securities representing an index, security or commodity and are traded on the stock exchange like any security listed on the exchange.

Mutual funds add around 5 lakh folios in Aug

Thursday, September 12, 2019, 5:38 PM

The mutual fund industry has added around 5L investors' account in August, taking the total tally to 8.53-crore, amid volatile market conditions. In comparison, the industry had added 10.29L new folios in July. Folios are numbers designated to individual investor accounts. An investor can have multiple folios. The total folio count stood at 8.38L in June, 8.32L in May and 8.27L in April.

Mutual fund SIP collection falls marginally to Rs 8,231 cr in August

Monday, September 9, 2019, 5:38 PM

Mutual fund investors continue to pour in money through SIPs. Mutual funds received Rs 8,230.76 crore via SIP in August, marginally lower than the collections last month, shows Amfi data. In July, mutual funds collected Rs 8,324 crore via SIPs. SIP AUM on the other hand has risen from Rs 2.69 lakh crore in July to Rs 2.71 lakh crore in August.


Debt Funds Videos

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Debt Funds Education

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What Is Financial Market?

Saturday, January 19, 2019, 6:00 PM

As the name suggests, financial market is a marketplace where the trading of financial instruments like bonds, mutual funds and shares takes place. It is an arrangement or institution that facilitates trading and where buyers and the sellers aggregate to trade in financial products. The financial market can be classified into the primary and secondary market.

What is a Systematic Investment Plan?

Wednesday, September 5, 2018, 5:28 PM

A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.

What is Net Asset Value (NAV)?

Wednesday, September 5, 2018, 11:19 AM

NAV is the total value of all the mutual funds assets minus the value of all its liabilities per unit. It is the price at which you buy or sell units of a mutual fund. The assets of a mutual fund are securities like equity shares, bonds, commercial papers and debentures. Accrued interest and dividends are also the assets of the Mutual Fund.



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