Debt Mutual Funds

Debt mutual funds are ideal investment options for individuals looking for a steady and predictable income stream. These funds primarily invest in fixed-income securities such as government bonds, corporate bonds, and money market instruments. These funds provide regular income through interest earned on the fixed income securities.
  • Debt mutual funds have relatively lower risk compared to equity funds.
  • Debt mutual funds offer diversification by investing in a range of fixed-income instruments.
  • Tax benefits: Some debt mutual funds enjoy tax benefits such as indexation benefits on long-term gains.

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Best Debt Mutual Funds 2024


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What is a Debt Mutual Fund?

An investment made towards fixed-income securities is known as a debt fund. The fixed income investments include securities that appreciate capital, like corporate debt securities, corporate and government bonds, money market instruments etc. This type of mutual fund is also known as a bond or fixed-income fund, and the investment period may be short-term, medium-term or long-term.

Debt funds investment is ideal for those individuals who cannot face the heat of the highly volatile market. The debt mutual funds returns are low compared to the equity funds but assure steady income. This reasonable safe option promises liquidity at a lower cost.

Types of Debt Mutual Funds

Each type of debt fund serves a unique purpose to accommodate different requirements of an entity’s financial journey. The type of debt mutual funds are explained below:

Liquid Fund

Liquid Funds invest in debt securities with maturities of fewer than 91 days. Due to their stable returns and low NAV volatility, they are appropriate for investors who need to temporarily lodge excess capital for a few days.

Money Market Fund

Money Market Funds invest in debt securities having a maximum one-year maturity. They aim to produce interest income returns while providing some room for capital gains due to their slightly longer term.

Overnight Fund

Investments made by overnight funds are primarily made in money market instruments with a one-day maturity. These funds focus more on convenience and liquidity than great returns. They are appropriate for investors who park money for a short time, primarily corporate treasuries.

Ultra-Short Duration Fund

Investors with an investment horizon of at least three months are eligible for the funds. These investments are regarded as low-risk and give higher yields than liquid funds. Certain ultra-short-duration funds could buy bonds with a lower credit rating to increase their yields.

Low Duration Fund

The profits from such investments are fair, and the risk level is moderate. These are helpful for people wishing to invest for about six months to a year. Bonds with lower credit ratings may be used in their portfolio to boost yields.

Short Duration Fund

Short duration Investments are made by funds in a carefully chosen mix of short- and long-term debt, as well as across credit ratings. These funds are suggested for investors with one to three years of time.

Dynamic Fund

There are no limitations on the type of security or investment maturity profiles for Dynamic Funds. The finest dynamic funds adjust their portfolio management dynamically and flexibly in response to market conditions.

Corporate Fund

Corporate Bond Funds must hold AA+ or better-rated corporate bonds for at least 80% of their portfolio. These funds are suitable for risk-averse investors seeking consistent income and principal safety.

Banking Fund

At least 80% of the assets in Banking and PSU Funds are invested in debt instruments issued by banks, PSUs, and public financial organisations. This moderate-risk investment aims to balance yield, safety, and liquidity.

Gilt Fund

Government securities with varying maturities are bought and held by Gilt Funds. Depending on the maturity of their portfolio, they might be either short- or long-duration funds. Gilt funds invest in secure G-secs; therefore, there is no default risk.

Credit-Risk Fund

A minimum of 65% of the funds' total assets must be allocated to corporate bonds with a rating of AA or lower. Due to this, they typically produce larger yields than the more cautious corporate bond funds. Credit risk funds may be an option for investors willing to assume a higher default risk.

Floater Fund

At least 65% of the assets in floater funds are allocated to floating-rate bonds. Because the coupons on their floating rate debt assets are frequently reset depending on market rates, these funds have lower MTM risk.

Long Duration Fund

The investments under this type have been over seven years, and the investment is made in the money market.

Medium Duration Fund

This type of debt funds investment has a period that ranges from three to four years.

Medium to Long Duration Fund

This type of debt funds investment has a period that ranges from four to seven years.

Benefits of Debt Mutual Funds

  • The best debt mutual funds offer the following benefits trust to conventional routes, debt funds do not have a lock-in period and may be redeemed whenever desired, subject to appropriate exit loads. Debt money is considered liquid since it can be withdrawn anytime during business hours. A few liquid funds additionally allow for quick redemption, allowing investors to instantly withdraw up to 50,000 per day per plan.
  • Debt funds can stabilise an investor's portfolio because they are often less volatile than equity funds. This can reduce overall risk and diversify an investor's portfolio. They are also considered reliable sources of long-term, generally predictable income.
  • Debt fund investments may offer higher returns than more conventional investing options. By selecting the appropriate fund that matches his level of risk tolerance and investment horizon, an investor can also benefit from shifting interest rates and perhaps create income.
  • Debt funds may be less tax-intensive than conventional investment channels. Unlike traditional channels that deduct TDS on the interest collected each year, debt funds are only taxed when redeemed, and the tax is only paid on the redemption proceeds. According to the investor's tax bracket, the dividend from debt funds is taxable in the investor's hands. When assets are held for longer than three years, LTCG (Long Term Capital Gains) of 20% and the benefit of indexation make debt funds more tax-efficient and can assist produce higher post-tax returns.

Why Should You Invest in a Debt Mutual Fund?

Debt funds may not seem like the wisest choice, but the following points may help you make the final decision.


Capital gains from debt and interest can be earned by investing in debt funds. Retail investors now have access to wholesale debt markets or money markets, which they previously could not participate in directly.

Less Risk

A smart allocation to the top-performing debt funds lowers risk and adds stability to an investing portfolio because debt funds are less hazardous than equity funds. Tactical debt fund investments help take advantage of transient yield opportunities.

Low Cost

The overall expense ratio of a debt fund is not permitted to exceed 2% of the assets managed, per SEBI regulations. While dynamic and long-term debt funds have greater expense rates, overnight and liquid funds have extremely low expense ratios.

Diversity in Investment

All points on the maturity and credit risk spectrum have access to debt financing. Shorter-term funds produce consistent and reliable income. Longer duration funds are appropriate for investors who can tolerate higher NAV volatility since they generate income from both interest income and capital gains. The most secure debt products are held by overnight, liquid, corporate bonds, and low-term funds. Funds with ultra-short and short durations may be set up to take on credit risk to offer better returns.


Debt funds are relatively liquid, and requests are quickly redeemable; redemption requests are typically fulfilled within one or two working days. There is no lock-in period, unlike bank fixed or recurring deposits. There are generally no fees associated with withdrawing a mutual fund investment, though a few funds may charge a minor exit load.

How do Debt Mutual Funds Work?

Based on the credit ratings of the securities, debt funds invest in a range of securities. The danger of not receiving the returns that the issuer of the debt instrument promised is indicated by a security's credit rating. A debt fund's management makes sure to invest in highly-rated credit instruments. With a better credit rating, the firm is more likely to make timely interest payments on the debt security and principal repayments when they are due.

Debt funds that invest in higher-rated securities are less volatile than low-rated securities. Additionally, maturity is influenced by the fund manager's investment strategy and the general interest rate environment in the economy. The fund manager is encouraged to invest in long-term securities by a regime of declining interest rates. On the other hand, a rising interest rate environment makes him more inclined to invest in short-term securities.

Things to Consider Before Investing in Debt Mutual Funds

The following must be kept in mind to invest in the best debt mutual funds for you:

  • Changes in interest rates have an adverse effect on the prices of fixed-income instruments. Price decreases when interest rates rise and vice versa. The price sensitivity of various fixed-income products to changes in interest rates varies. Duration is another name for the price sensitivity to changes in interest rates. The sensitivity to fluctuations in interest rates increases with an instrument's duration.
  • Credit risk refers to the risk of default or the issuer of the fixed income instrument failing to pay interest and the principal. Rating agencies provide credit ratings to instruments after evaluating the credit risk of fixed-income instruments in light of the issuer's financial stability. The price of an instrument will decrease if its credit rating is reduced. In the same way, if there is an increase in credit rating, there will be a price increase as well.

Invest According to Your Investment Plan

Debt mutual fund returns can be tracked to duration as short as seven days to as long as 7+ years. The different debt funds available for investment purposes have unique features, making the investment decision difficult. They must recognise the importance and salient features of each type and decipher which one aligns best with their plans. The generated debt fund returns are a source of regular income for some investors, while others use these funds for stability. Therefore, investment decisions must be made according to the investment plan of the investor.

Debt Mutual Fund Taxation

Investors must realise the tax implication when investing in debt mutual funds. Investors might receive capital gains and dividends from debt funds. A capital gain is a difference between the purchase price and the sale or redemption price of the units.

Different tax rules apply to capital gains depending on how long an investor owns mutual fund units. If an investor holds a debt fund investment for up to three years, capital gains on redemption or sale are treated as short-term capital gains and are subject to tax at the investor's appropriate income tax slab rate. If the debt fund is sold or redeemed after being held for more than three years, the investor benefits from "indexation."


The following example will be able to resolve better if you have any queries. Let's say you purchased a debt fund in the fiscal years 2017-18 for $100 and sold it for $160 the next year. Since the investment range has been over three years, you have LTCG. In FY18 and FY22, the Cost Inflation Index (CII) was 240 and 280, respectively. Your purchase price will rise to (280/240) x 100 for tax purposes, or 117, and your taxable long-term capital gain will be 160 - 117, or 43. The tax due is equal to 8.60, or 20% of 43.

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Frequently Asked Questions

Are Debt funds a good investment option?

Debt funds promise liquidity and are a good investment option for those who have a low-risk appetite.

What is the difference between equity funds and debt funds?

The main difference between the two is that debt funds invest in fixed income, whereas equity funds invest in equity shares and related securities.

How do I start a SIP in a Debt fund?

You must seek a debt fund representative to start a SIP.

What is a debt fund with an example?

A debt fund is a mutual fund scheme that invests.

Are debt funds risk-free?

No, debt funds are not risk-free. Although as compared to equity funds, debt funds are less risky.

Which debt fund is best?

DSP Healthcare Fund is the best debt fund.

Is it good to invest in debt funds?

It is good to invest in debt funds with a low-risk appetite. The investment is made in securities at a predetermined interest rate and returns the amount invested at maturity.

Is it good to invest in a short-term debt fund?

Short-term debt funds provide liquidity, tax benefits and better returns than other debt funds.

Which debt funds are safe?

Liquid debt funds carry the lowest risk, making them the safest bet.

How do I choose a debt fund?

You must choose a debt fund that aligns with your financial goals.

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