Understand What are Debt Mutual Funds, Types, Benefits

Understand What are Debt Mutual Funds, Types, Benefits

Apr 15, 2024

Apr 15, 2024

debt mutual funds
debt mutual funds

Investing our hard-earned money has always been a tale of confusion. Most of us want to move away from the feeble interests offered by our banks, but a risky wall of equity always puts a halt to it. However, there is a horizon of mutual funds that only focuses on the less riskier domain, debt funds. Debt funds are preferred by people with a lower risk tolerance. This lower risk is possible because a debt fund invests its corpus into securities that generate fixed income, such as treasury bills, corporate bonds, commercial papers, government securities, and many other money market instruments. In this article, we will discuss everything you need to know about debt funds, including its benefits, types, and why it would be your best investing option.

Features of debt funds 

Stability in returns:

Debt funds are not subject to market risks. Hence the returns, even though comparatively lower than equity based funds, are stable and predictable. By investing in debt funds, you can also diversify your portfolio to bring down the overall risk involved amongst other investment domains.

High liquidity:

Fixed deposits are defined by lock-in periods. If you liquidate your FD prematurely, there is a very high scope for a penalty. Debt mutual funds have no lock-in periods, however, some funds charge you an exit load which is a charge deducted at source for early withdrawals. 

Tax efficient:

If tax reduction is what you seek, a debt mutual fund is indeed a viable option. Debt mutual funds taxation is more efficient than traditional investment options as they only require you to pay taxes in the year you redeem. Ideally, you pay Short Term Capital Gains tax if you hold your mutual fund units for less than three years and Long-Term Capital Gains for investments beyond three years. 

High flexibility:

Through a Systematic Transfer Plan, debt funds allow you to move around your money to different funds. With such an option, you are granted an opportunity to transfer smaller amounts of funds systematically into equity at regular intervals, thus fairly reducing risk.

Major types of debt funds:

  • Liquid funds 

These are highly liquid debt funds with a maturity period of not more than 91 days. Investors can withdraw up to Rs.50,000 from several liquid funds almost instantly. These funds are the least risky, both in terms of liquidity and losses.

  • Short/medium/long term funds 

With a maturity period of 1-3 years, short term funds carry the lowest risk among other tenures as their prices are less likely to be impacted by the change in interest-rate movements. Medium term funds come with a maturity of 3-5 years and long term funds with beyond 5 years, making them relatively more riskier than short term funds because of the impact of interest rates. 

  • Dynamic bond funds 

In such a setup, a fund manager of a dynamic bond fund actively manages the portfolio's duration  in response to changing economic conditions, interest rate expectations, and credit risk assessments. This flexibility allows them to counter and capitalize on complications and opportunities in different segments of the market.

  • Fixed maturity plans

These are similar to traditional FDs as they come with a specific lock-in period. This period can vary based on different schemes. Investments in FMPs can only be made during initial offer periods. 

  • Overnight funds

With a maturity period of just 1 day, overnight funds are the safest of them all. These funds are classified based on their extremely short investment horizon and invest in various types of securities, such as overnight reverse repos, CBLOs, and other debt instruments with next-day maturity. (Taxation of overnight funds is similar to any other debt mutual fund scheme).

  • Gilt funds

These funds invest at least 80% of their investable assets into government securities across diverse maturities. Even though they come with a low credit risk, they are highly subject to fluctuations in interest rates. 

Why are debt mutual funds a better option?

Professional expertise:

Debt mutual funds are always managed by experienced fund managers who analyze market trends, interest rate movements, credit risks, and other factors to make informed investment decisions. This expertise and capability can potentially lead to better returns compared to individuals managing their own portfolio.

Diverse options:

These funds come with a wide array of preferences in maturity and credit risk. Classified in the broadest sense as short term, long term and, very short term funds such as overnight funds, these funds offer an investor both flexibility and risk tolerance.

Low risks:

Debt mutual funds are less risky than equity funds, therefore, it minimizes risk and adds serious stability to your valuable investments. With proper diversification and interest rate management, debt mutual funds are the safest option amongst other funds. However, it's crucial to thoroughly examine both the fund's track record and the performance history of the fund manager before investing in any debt fund.


These funds are extremely liquid and promote quick withdrawals, usually within one or two working days of the request being made. It also lacks a lock-in period unlike fixed deposits and comes with nearly zero exit costs. In a general sense, there are no penalties for early withdrawals in a debt mutual fund.

How to invest in the best debt mutual funds?

In India, there are two ways in which someone can invest in a debt mutual fund; through SIPs or as lump sum.

  • SIP

If you want to invest smaller portions of money at regular intervals, an SIP is the better alternative. This is better matched for employees who receive a regular salary on a monthly basis.

  •  Lumpsum

In case you have a considerable amount of money you wish to invest in one go, the lump sum method is the way to go. This can be considered appropriate if you have a significant corpus of investment capital. 

For investing through either of these schemes in India, you would need to thoroughly analyze both the fund and Asset Management Company(AMC) history and other variables before choosing one. After that you are required to create an account with an AMC, invest the required amount and monitor its growth occasionally.


Debt mutual funds are one among the most practical options for investors seeking a safer investing domain that remain unaffected by market fluctuations. With returns averaging at slightly under 10% completely based on the maturity time frame and fund, investors find this as the safest and most practical method of investment in India. However, proper research about both the fund and the management company is advised before choosing any investment schemes to avoid the inevitable risks that exist in the investing domain.

If you are looking for stable fixed investment plans that offer better returns of up to 15% in shorter periods of time, you’re at the right place. Explore the world of Tapinvest’s elite investing opportunities and see what you’re missing out with nothing more than a tap.

FAQs On Debt Mutual Funds:

1. Are there risks in debt mutual funds?

Even though considered as the least risky investment option in India, debt Mutual Funds can be subject to credit risk and interest rate risk. 

2. Are debt mutual funds better than equity mutual funds?

Usually, debt mutual funds are less risky than equity funds, however, with safety comes lower returns. To add to that, their respective performance also depends on several factors in the domain.

3. Can debt mutual funds provide regular income?

Debt mutual funds can provide regular income in the form of interest payments and dividends. Investors can opt for dividend payout options to receive periodic income distributions from the fund.

4. What are the taxes on debt mutual funds?

With the Amendment to Finance Bill 2023 scrapping the indexation benefit on debt mutual funds, they will now be taxed at investor’s slab rates. These changes will bring the taxation of specified mutual funds at par with fixed deposits.

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© 2023 Purple Petal Invest Private Limited

Get started with as low as ₹50,000.

Get started today

The Company is an intermediary platform facilitating transactions in financial products. The information comprised herein is merely for information purposes and are subject to verification by investors. Investors are advised to refer and read carefully the offer documents.

© 2023 Purple Petal Invest Private Limited