Debt Mutual Funds are mutual fund plans that invest in fixed income securities, such as Government Bonds, corporate debt securities, and other money market securities etc that deliver capital growth. Debt funds are also known to as Fixed Income Funds or Bond Funds. 

Based on the credit rating, debt mutual funds invest in a wide range of securities. The credit rating of a bond indicates the danger of default in issuing the profits guaranteed by the debt instrument issuer. A debt mutual fund manager makes sure that the investment is done in highly rated credit instruments. A higher credit rating means that the entity is more likely to pay interest on the debt security regularly as well as pay back the principal upon maturity.

Debt mutual funds seek to increase profitability by investing investor’s money in platforms like bonds and other fixed-income securities. This implies that these funds purchase the bonds and gain profits from the interest on these assets.

This is similar to the function of a Fixed Deposit. Bank legally lends money to customers through the deposits of investors. In exchange, the bank provides interest income on the lent money to the investors.


Who should invest in debt mutual funds?

Debt mutual funds are particularly important to investors with lower risk tolerance. Debt funds typically diversify across different assets to maintain sustainable gains. Although there is no assurance, the yields are generally in the range estimated. 

Debt mutual funds in India are appropriate for individuals with short term investment horizon as well as medium-term investment horizons. The short term varies from 3 months to 1 year, while the medium term investment horizon varies from 3 years to 5 years.

For investors involved in moderate risk, debt funds are most suitable. There is a lesser risk of investing in debt mutual funds as compared to equity funds. These funds could be the right option for an investor if they have a reduced tolerance for risk.

If an investor has surplus fund, he or she can invest in debt funds. Diversifying the investment portfolio is another incentive you get from investing in debt funds. In the event that an investor has a higher stock allocation in the portfolio, investing in debt mutual fund may be a great way to reduce the overall portfolio risk. Any potential loss of returns can be cushioned by the debt factor.

Types of Debt Mutual funds:

There are number of possibilities for investing in debt mutual funds in India. Based on various factors like investment horizon, risk appetite etc, debt mutual funds can be categorized in a number of debt mutual fund types as listed below:

Overnight Fund

Overnight funds invest in assets that have a one-day trading horizon. Interest variations are small, considering the short length of investments. These funds are reliable investments.

Liquid Fund

Liquid Funds, as the name implies, invest mainly in very short-term, highly liquid money market securities and debt securities and therefore have high liquidity. Liquid funds invest in very short-term instruments with maturities of up to 91 days, such as Government Securities, Bank Guarantees and Deposit Certificates to produce capital appreciation while retaining protection and higher liquidity. In these liquids funds, redemption applications are approved within one working day.

Ultra-Short Duration Fund

These debt funds are invested in debt and money market instruments maturing between a period of 3 to 6 months. Higher returns than a fixed deposit are usually given. These funds bear a relatively lower risk at the interest rate.

Low Duration Fund

The Low Duration Fund invests money in debt and money market instruments, so that the duration of the investment portfolio varies from 6 months to 12 months.

Medium Duration Fund

This is an open-ended short-term debt scheme that invests money for the duration of 3 years and 4 years in debt-related instruments.

Medium to long term duration

This Medium Period Fund is an open-ended short-term debt fund that invests in debt securities with duration of 4 years to 7 years.

Long Duration Fund

Long Term Funds are debt mutual funds that are invested in various market scenarios to achieve steady returns. They invest mainly in securities containing Government securities or bonds in the long term. The fund has a length of more than seven years.

Fixed Maturity Plans

Fixed maturity plans have pre-defined maturity tenure. The fund is withdrawn at the current NAV after the maturity date. 

Fixed maturity plan’s tenure can vary from as low as 30 days to 5 years. Since the maturity date and the sum are determined in advance, the fund manager may invest in securities which have a maturity close to that of the plan. 

Income Fund

Income fund is a category of debt mutual fund which through active portfolio management, aims to provide steady rate of returns in all market conditions. Although it is a debt mutual fund, income funds are often at risk of producing low growth, as certain situations may lead to a dramatic decrease in interest rates, resulting in a fall in corresponding bond prices.

Floating Rate Fund

A floater debt fund invests a minimum of 65 per cent of its total assets in floating rate debt instruments.

Dynamic Bond Funds

Dynamic Bond Funds invest in various maturity patterns of debt securities.  These debt mutual funds give the fund manager the leverage to invest in short-term or longer-term instruments on the basis of the momentum of interest rates. By having a consistent check on different domestic as well as global economic movements and interest rate outlooks, Dynamic Bond Funds follow an active strategic approach to portfolio management.

Gilt Fund

The term Gilt applies to government bonds. A gilt fund invests in government securities issued by state and central governments for various investment time zones. These funds normally do not have the possibility of default, because the government is the provider of the securities. Gilt funds invest in Gilts with short as well as long-term maturity instruments. 

Corporate Bond Fund

The Corporate Bond Fund is classified as funds that put at least 80% of their investment in the highest-rated corporate bonds. They provide opportunity for earning greater yields as compared to short-term debt funds. However an investor needs to observe ratings-related credit risk.

Credit Risk Fund

The Credit Opportunity Fund usually invests 65% of its capital in debt instruments ranked below the highest quality of credit. Unlike other debt funds that are based on assessing the duration or the average maturity, these funds make investment decisions based on the proportion of investments in high interest yielding low-rated bonds. They could therefore be more volatile than other debt funds.

Credit Opportunity Fund

Credit opportunity funds, unlike other debt mutual funds, do not invest according to the maturity of debt instruments. By taking an investment decision based on credit risks or buying lower-rated bonds that come with higher interest rates, these funds aim to earn higher returns. These funds are relatively riskier. 

Banking and PSU fund

A minimum of 80 per cent of total capital must be invested in debt instruments of banks or public sector undertakings or public financial institutions by a banking and PSU fund.

How to choose best debt mutual funds:

While choosing the best debt mutual funds as per your financial goals, it is crucial to consider some important factors as listed below

Financial Goals

Not just with Debt Mutual Funds, it is always best to set financial goals in advance before choosing any mutual fund investment option. Whether you are creating an emergency fund or planning to buy a car, it is suggested to fix the target beforehand. You must understand that different types of debt funds accommodate various investment objectives. Therefore once you specify your investment target, the process of choosing the right fund becomes simpler.

Allocation of Assets

It is essential to check the distribution of assets of the funds before investing in the debt mutual fund. You have to check the overall asset allocation like how much the fund is investing in government securities or corporate bonds.

Corporate bonds typically give a higher rate of return than public securities, but they often entail higher risk. If you are a conservative investor, you can prefer a debt mutual fund that has a major portion of government bond assets under control. At the same time you should be clear that investment in government securities carries interest rate risk.


Liquidity is one of the major aspects of investing in debt mutual funds. For instance, if you want to put your money for a very short span of time, a liquid fund that can be withdrawn easily will be the best option. You can place your capital in an income fund, which invests in fixed income instruments with a longer term, if you are able to remain invested for a longer term.

Investment Horizon

Every target for investment has a clear time frame or a deadline. You need to fix the time horizons for the investment to receive returns in expected time frame. So it is important to check what type of debt mutual fund suits to your requirements.

For example, liquid funds are preferable for those investors who are looking for ultra short-term investment target of about 3 months to 1 year. An investor can opt for short-term debt mutual funds if the tenure is between 1-3 years. But if an investor has a 3-5 year medium time period fop investments, dynamic or medium term bond funds would be more relevant.

Risk Factor

Relevant risks such as credit and interest-rate risk often come with debt funds. Credit risk arises when the money is invested in securities with a poor credit rating. This can result in a higher possibilities of default.

For example, as interest rates increase, bond prices could decline, leading to lower returns on your investment. This is why it is important to carefully check the background of the fund as well as the past performance of the fund manager before entering in any debt mutual fund. Investments in debt funds are perceived to be much safer than equity mutual funds, provided that interest rates do not fluctuate much.

Expense Ratio 

Likewise any other mutual fund investment options, you’ve got to carefully look at expense ratios before investing in debt mutual funds. A high expense ratio could make a significant impact since yields from a debt mutual fund are comparatively on the lower side.

Credit rating

It is preferable to check the ranking of any debt mutual fund before making an investment decision. Make sure that the credit rating of all investments under the debt mutual fund is high.

Benefits of investing in Debt Mutual Funds

Debt mutual funds in India offer a number of advantages over other conventional investment options. Below are some of the benefits of debt mutual funds:

Comparatively Lower Risk

One of the greatest benefits of debt mutual funds is that there is a low investment risk. For investors who would like to keep it simple, safe and escape the uncertainty that is prevalent in the other investment avenues, debt mutual funds holds the potential of a steady income. Most of the debt funds invest in securities of the government that bear much less risk. Apart from that some of the best debt mutual funds in India invest only in those with a high credit rating.

Offer Higher Liquidity

Another benefit of debt mutual funds is that they are a lot more liquid than many other investment options that provide fixed income. Apart from that an investor need not to wait for a longer period as there is no lock-in conditions like bonds or fixed deposits. Within a few days of investment tenure, sum invested in debt mutual funds can be withdrawn easily. It might also be easier and take only a couple of hours in the case of liquid funds.

Best Suitable for Savings

If you have some excess fund and you do not want to keep it in bank’s saving account, debt mutual fund is the best option for parking the funds for short term. Also if you get a large sum of money from either selling a property or through voluntary retirement, and you want to park it somewhere for a short period of time, you can put it in a liquid debt fund or a short-term fund before you determine what to do with the large sum.

Instead of making this money sit idle in saving account, you can earn interest on the amount, and because the risks are minimal, when you withdraw the fund, you can be reasonably sure of having a return on the money invested.

Diversification Benefit

In order to minimize the investment risk, diversifying your portfolio is important. Although equity mutual funds can deliver better returns, a higher degree of risk is also involved. So it’s safer to have some proportion of debt funds investment in your portfolio to offset the risk.

Suitable for Several Financial Goals

Debt funds are ideal for meeting several forms of financial goals. For example, if you want a consistent flow of income after retirement, it is best to invest a significant proportion of your fund in debt funds. Equity markets are unpredictable and you will need to remain invested in order to make sustainable returns for a longer period of time. Debt mutual funds don’t have this uncertainty issue. Financial experts suggest that, when you retire, you should build at least 60 per cent of your portfolio with debt funds preferably.

Tax Benefits

Debt mutual funds in India also give investors some tax advantages. If you consider a case of investing in fixed deposits, the interest received will be credited to your taxable income and will be taxed each year. On the contrary, if you invest in debt mutual funds, you only need to pay the taxes when you redeem your investments.

In addition to this, if you stay invested in the debt mutual funds for less than three years, your earnings will be added to the gains and taxed accordingly. However if you stay invested for more than three years, after indexation, you will be required to pay 20 percent on the gains, or 10 percent without the indexation. Dividends on debt mutual funds in India are tax-free, but there is a 25 percent distribution tax on dividends.

Small amount can be invested

Another advantage of debt mutual funds is that through a Systematic Investment Plan or SIP, you can start investing through small amounts per month. Every month, you can invest as low as Rs 500. Through SIP strategy, you have the ability to make far more money by saving consistently every month instead of hoping to raise a large sum and then invest.

To get make most out of your investments, we recommend investors to check benefits from direct vs regular mutual fund plans as an investor can benefit more from regular mutual fund plans than direct plans. Investors get expert guidance in investments through regular mutual fund plans which is absent in direct plans. 

When selecting the best debt mutual funds India that are ideal for your financial goals, an investor should wisely consider different factors which include but not limited to risk, returns, expenses, the maturity duration of the funds, and the tax on earnings. You can refer the Debt Mutual Fund FAQs by AMFI India to know more about these funds.

Why Chitale CFS Pvt Ltd?

Chitale CFS Pvt Ltd offers wide variety of investment avenues for short as well as long term investment needs. With more than 30+ years of experience, we are one stop solution for a number of financial products like Mutual Funds, Insurance, Bonds, Fixed Deposits etc. We serve our clients with highest standard of transparency and integrity by putting investor’s interest first.

You can contact us by calling on +91 8999116127 or email us at [email protected]  or [email protected]

Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.

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Mutual fund investment is subject to market risk, read scheme related document carefully before investing.