Debt Mutual Funds are known for the stability & regular source of income and are claiming 85% of Mutual Funds Industry Investment.
Written by CA Pankaj Chhabra – 
& Megha Jain –
A debt fund invests in fixed income instruments, such as corporate debt securities, bonds, and other money market instruments, providing a steady stream of income while also diversifying your portfolio.
Debt funds are one of the most secure forms of investment in India. Risk-averse investors who prefer stability in their investments can look to invest in this type of security.
Related article: Basics of Mutual Fund
Types of Debt Mutual Funds
With a wide range of options to choose from, debt mutual funds can be tailored to suit your investment goals. The maturity period is the primary differentiating factor between different types of debt mutual funds.
Following are a few types of debt funds on the basis of maturity period:
Short-Term Funds
As the name suggests, short-term debt mutual funds have a shorter maturity period, spanning about 1 to 3 years. These funds are usually accompanied by stable returns and modest risks.
These invest in government securities, debt, and money market instruments. Short-term debt funds are best suited for low-risk investors with a low-to-moderate investment horizon of 1–3 years.
Ultra-Short Duration Funds
These funds come with a very short maturity period, usually ranging between 3-6 months.
Suitable for investors with short-term goals who are looking for an alternative to bank deposits. Shorter duration may provide lower returns but are safer as compared to funds with longer term horizons.
Income Funds
An income fund is a mutual fund that emphasizes investment in fixed-income securities like debentures, corporate bonds, government securities, etc. for a longer duration.
Invest in debt securities with different maturity periods, usually for a duration of 4 years or more. They aim for capital safety combined with an objective of providing regular returns.
Dynamic Bond Fund
Dynamic bond funds are debt mutual funds that invest in debt and money market instruments, but they do not have any restrictions with regards to the duration or maturities of the securities they invest in.
The fund manager keeps changing the investor’s portfolio composition as per the fluctuating interest rate regime.
Liquid Funds
Liquid Mutual Funds invest in debt securities having a maturity period of less than 91 days. Assets invested are not tied up for a long time due to their extremely low lending duration.
These funds are best-suited for investors who want to park their cash surplus for shorter periods, as they can provide steady returns with minimal NAV volatility.
Overnight Funds
Overnight Mutual Funds invest in highly liquid debt securities maturing the next day, commonly money market instruments like Treasury Bills, Commercial Papers, etc.
These finances aim to provide liquidity and convenience rather than high returns. Overnight funds are suitable for investors with a short investment horizon who want to keep their money liquid and accessible or are looking for a low-risk option to park cash while they decide on a longer-term investment.
Fixed Maturity Plans (FMPs)
FMPs are closed-end funds that invest in debt securities with maturities that match the terms of the scheme. These funds have a fixed tenure, which can vary from a few months to a few years.
They are designed to provide investors with predicted returns. They invest in very low-risk, highly rated debt funds that hold passively until the maturity period and are paid out to the investors when the securities are redeemed.
Related article: What is an Equity Mutual Fund?
Benefits of having Debt Funds in your Portfolio
Stable returns
Debt funds are relatively less volatile and are more likely to provide regular income in the form of interest payments. It’s a safer option for investors with a low-risk appetite.
An investor can also take advantage of changing interest rates and generate income by choosing the right fund that matches their risk appetite and investment horizon.
Hedging against volatility
Debt funds offer you a good hedge against the volatility of the equity market. The percentage of debt in your portfolio will depend on your financial plans and timelines and the investor’s ability to take risks.
This diversification helps stabilize investment returns by bringing down the overall risk of the investor’s portfolio.
High liquidity
Debt funds can be liquidated easily, and an investor can cash out investments much quicker than most other traditional investment avenues, like fixed deposits (FDs), that come with mandatory lock-in periods and attract penalties for premature withdrawal.
They don’t have a lock-in period and can be redeemed at anytime, subject to applicable exit loads.
Lower Fees
Debt funds have lower transaction fees compared to equity and other mutual funds. Unlike FDs, which are considered by most investors, debt and other mutual fund schemes do not attract TDS.
However, investors will pay taxes based on the period of investment after the redemption of fund units. Overall, this fund offers better returns compared to fixed deposits or savings accounts.
How to start Investing in Debt Funds?
- STEP 1- Download the SPA Capital App (Available on Android & Apple Store)
- STEP 2- Create your profile
- STEP 3- Select any Small Cap fund from the list of Funds
- STEP 4- Choose between SIP or Lump sum mode
- STEP 5- Complete the payment process
Click here to understand – Taxability of Debt Fund
Conclusion:
Debt mutual funds are investment instruments that primarily invest in fixed income securities like government bonds, corporate bonds, treasury bills, and money market instruments. These funds offer investors a stable source of income with lower risk compared to equity investments.
Debt mutual funds are managed by professional fund managers who carefully choose the securities to invest in, based on their credit ratings, maturity, and yield.
The returns on debt mutual funds depend on the interest rate movements, credit rating of the securities, and the expenses incurred by the fund. Investors can choose from a variety of debt mutual funds based on their investment goals, risk appetite, and investment horizon.
