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How are you all?

Through the previous article, we explained to you about Equity Funds and their significances. We also told that equity funds are the most favored funds for capital appreciation in the long run. So, did you plan your investment?

Wait, are you confused, will these long-term benefiting equity funds, the right choice for your short-term goal? Are you worried, and avoiding investment, just because you can’t stay invested for the long-term?

You really need not worry! Today, through this blog, we are going to explore, one more important category of mutual funds, that is Debt Fund. Read this blog and know about the Debt Funds, its features, and its benefits, this will help you decide your investment with short tenure.

Debt Funds is among the main categories of mutual funds, this fund has its own significances and risk associated, with it. Let’s understood its concept!


What are Debt Funds?

Debt Funds, also popular as bond funds, are a kind of mutual fund scheme, that invests in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper, and other money market instruments. In these funds, the issuer of the funds decides the rate of interest, as per the investor will receive the benefit and decides the maturity period of investors fund.

Specifications of Debt Funds

  1. Low-Risk Factor: Debt fund is considered, as the low risky funds among the different mutual funds, they ensure no loss to investors on their investment in Debt Funds. However, the possibility of risk arises only when the interest rate goes up in the market.
  2. Good returns in the Short-Run: Debt funds are featured for those investors, who bear a short investment tenure, and short-term investment goal, like buying a car, planning a foreign trip and many more. Although these funds have a low return, as compared to Equity funds, they do yield good returns in a short period.
  3. Tax Benefits: Generally, debt funds are short term investment funds, but as per modified tax rules in mutual funds, if investor remains invested for three years, in a disciplined manner, they can earn tax benefits on their returns. Debt funds held for more than 3 years are considered as long term and taxed at 20% after indexation. If the investor redeems their debt fund, before the period of three years, the gains will be added to the person's income and taxed as per the applicable income tax slab.

Note: Dividend received from a debt fund is tax-free in the hands of the investor.

  1. Investment Transparency: In Debt Funds, the investors receive an exact portfolio, with details of each investment, on a monthly basis. This helps the investor to decide their investment in debt funds as per their choice.
  2. Avails the option of Lump-Sum and SIP investment: Investors can either invest via SIP or Lump-sum in debt funds as per their comfortability.
  3. Diversification: Debt funds provide a variety of funds, for investor's portfolio diversification. By investing in debt funds, investors can get exposure to several types of bond funds by investing a nominal amount.

Types of Debt Funds

Like Equity funds, Debt funds do have a variety of sub-category funds, that avails a good diversifying option to its investors. The primary basis, for different types of debt funds, is the maturity period of the instruments they invest in. 

  1. Dynamic Bond Funds: These funds alter allocations between short-term and long-term bonds and take advantage of changing interest rates. These funds focus to generate maximum returns in both rising and falling market scenarios.
  2. Income Funds: These funds mainly focus its investments in high dividend-generating stocks, government securities, money market instruments and more, generating regular income for the investors.
  3. Liquid Funds: These funds invest in short-term market instruments such as government securities, treasury bills and more, that hold the least amount of risk. These funds invest in instruments with a very low maturity period (up to a maturity of 91 days).
  4. Fixed Maturity Plans: Investment in these funds can be made, only during the time of a new fund offer. These funds have a fixed maturity period and generally invest in high rated securities and corporate bonds.
  5. Short-Term and Ultra Short-Term Debt Funds: These funds focus its investment in instruments  

       with shorter maturities, ranging from 1 to 3 years.

  1. Gilt Funds: These funds, focus its investment only in government securities, as they generate returns based on fixed interests. The specialty of these funds is, they give a chance to the investor, to become part of the nation-building process while earning returns, as money invested in these funds goes towards infrastructure building and other government projects.
  2. Credit Opportunities Funds: These funds take credit risk by investing in lower-rated bonds that come with higher interest rates, to generate higher returns.

Benefits of investing in Debt Funds

  1. High liquidity: Debt Funds, and especially Liquid debt funds, contain high liquidity, and an investor can at any time redeem their funds, as per their choice, and cash-out their investment.
  2. The flexibility of transferring Funds: Debt fund avails, its investors with the option, to transfer their invested money to an equity scheme or any other scheme, as per investor's choice.
  3. Debt funds provide a good option for diversifying investor's portfolios.
  4. Availability of SIP (Systematic investment plan), make it more convenient.

Who Should Invest in Debt Funds? 

Debt Funds are low risk associated funds and are featured to yield a good return in a short tenure. However, the returns in debt funds are partly affected by interest rate risks and credit risk. They are also preferred more among other fixed return investments like FD’s (Fixed deposits).

Investors, who have a low-risk profile, and are planning for short term investment, then Debt funds are featured for them. Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best mutual fund, for your investments as per your requirement.

As of now, you are aware of the concept of Debt funds and its benefits, plan your investment in debt funds, to fulfill your short-term goals.

You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Best Debt funds which have performed well in the past 5 years – 

Top Debt Funds

5-year Returns

Edelweiss Government Securities Fund – Regular Plan-Growth Gilt Fund


DHFL Pramerica Dynamic Bond Fund-Growth Dynamic Bond Fund


Reliance Income Fund-Growth Medium to Long Duration Fund


Aditya Birla Sun Life Floating Rate Fund – Regular Plan-Growth Floater Fund


Axis Banking & PSU Debt Fund – Growth Banking and PSU Fund


Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).