Home > Mutual Funds > WHAT ARE DEBT FUNDS?


Mutual Fund investments are regarded as one of the most lucrative investment options. Despite being regarded as conservative and safe investments, mutual funds can help you reach your financial goals much faster than most other conventional investment options such as fixed and recurring deposits. Mutual fund investments can be made in lump sums or in installments through SIP (Systematic Investment Plans). You can also choose from various kinds of mutual funds across different categories and investment objectives. One of the most popular types of mutual funds is the debt fund. Let us look at debt fund meaning in detail.


Debt mutual funds are generally a mixture of debt or fixed income securities like Government Securities, Treasury Bills, Corporate Bonds, other money market instruments and debt securities of different maturities. Debt Mutual Funds invest in bonds that are assigned credit ratings which show the ability of the issuer to pay back the debt over a period. The credit ratings are issued by companies like CRISIL, CARE, FITCH, and ICRA. But simply knowing what is debt fund is not enough. We should also understand how debt funds are differentiated.

Debt funds are differentiated based on the instrument they choose to invest in. For instance, if the maturity period of debt funds is longer than one year, then such debt funds are called debentures or bonds. However, if the maturity period is shorter than a year then they are introduced as commercial papers or treasury bills. The borrower/issuer of these bonds and securities are legally bound to pay the principal along with interest at the end of the agreed-upon period.

Debt funds have a presentation value on which the rate of interest is calculated. Usually, an investor who desires to invest in this fund is concerned with the interest rate, face value, maturity value, and period. On an average, these funds are held until maturity, unlike other mutual funds that see a lot of attrition.

detailed infograhic for what are debt funds


Now that we know what is debt fund, let us find out the different types of debt funds. There are many types of debt funds that cater to the different investment needs you might have. Listed below are some of the most common types of debt funds:

  • Gilt Funds

  • Ultra-Short Term Funds

  • Fixed Income Funds

  • Fixed Maturity Funds

  • Liquid Funds

Let’s learn more about the above-mentioned debt funds:

Gilt Funds

Gilt funds invest in all government debts including bonds issued by Central Bank on behalf of the government. This also includes the ones issued by the state government. The investment is done on paper hence they carry zero default risk. But, the interest rate can remain a cause of concern. In fact, long-term gilt funds are the riskiest funds as they are sensitive to interest rate charges.

Ultra-Short Term Funds

The investment is done in debt securities like commercial papers, certificate of deposits etc. Ultra-Short Term funds come with maturity periods of 3-6 months and are not affected by changes in interest rates. Hence, the returns of ultra-short-term debt funds are consistent.

Fixed Income Funds

The fixed income funds are invested in corpus across debt instruments like bonds, government securities, and corporate debentures. You can invest in fixed income funds lasting for shorter tenures with maturity within 1-2 years’ time frame or even long tenures with 15-20 years until the fund matures.

Fixed Maturity Funds

Fixed maturity funds are those funds that have a fixed tenure. They invest in papers with matching maturity and are held until then. Hence, they take away the interest rate risk. Even if the interest rate moves up, the Net Asset Value or NAV is not affected.

Liquid funds

Liquid funds invest in liquid money market instruments such as inter-bank call money market, treasury bills, commercial papers and certificate of deposits. The returns on liquid funds are most suitable as compared to others. Since they provide easy liquidity and the investor can exit the fund at any time, liquid funds make for a good substitute of savings banks account.

Having explained the debt fund meaning and types, we shall now look at the differences between debt funds and other forms of investments.


Both debt mutual funds and fixed deposits are a good option for the cautious investor. However, debt funds hold an edge over fixed deposits in several ways. Here are five points that highlight the advantages of debt funds over fixed deposits:

  • In FDs or RD, TDS is applicable if the interest income exceeds ₹10,000 per year. However, when it comes to debt mutual funds, TDS is not applicable.

  • Debt mutual funds can be set off against short or long term capital losses from your other investments.

  • Debt funds can give better returns on investment than savings banks accounts and bank deposits, that too within a shorter duration.

  • Your debt mutual fund investment is as safe as your fixed deposit in your bank account.

  • You can continue to invest in Debt funds even during your retirement phase by opting for Systematic Withdrawal Plans (SWPs).

Now that we know what is debt mutual fund and how it differs from other investments, let’s take a look at the right methods to choose debt funds.


Choosing a debt mutual fund should be based on two factors, the investment horizon and the scheme matching it. This will help remove all the major confusions pertaining to investments. Here’s how you can choose the right debt fund to meet your requirements:

  • Duration of the Investment Period

  • High-Quality Profile

  • Lesser Exposure to Risks

Now let’s look at the above-mentioned points in greater detail:

  • Duration Of the Investment Period

    Debt mutual funds specify the investment time frame. There are debt funds specially designed to be invested in i.e. you can stay invested in a debt fund for the short term, medium term, or the long term. The instruments that these funds invest in are chosen according to the returns that they offer while the fund manager keeps a check on the risks involved.

  • High-Quality Credit Profile

    Debt mutual funds are chosen with a focus on the highest credit quality exposure. Globally, only the highest quality credits such as A1P1 are eligible for liquid funds. These ratings represent long-term ratings of up to A or at best A- on the global rating scale.

  • Lesser Exposure To Risks

    Debt mutual funds are exposed only to the risk of interest rate fluctuations which affect the prices of underlying bonds in the fund portfolio. Since the interest rates don’t fluctuate much, investments in debt funds are considered to be much safer than those in equity funds.

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After establishing what is debt fund let’s look at some of the prime benefits of investing in debt funds:

  • No Loss on Day’s Growth

  • Higher Returns and Tax Benefits

  • Flexibility

Let’s take a look at the above-mentioned benefits in detail:

  • No Loss of Day’s growth
    With investments in mutual funds, the investors do not lose even a day’s growth. The investment does not stop growing until you redeem it.

  • Higher Returns and Tax benefits
    The pre-tax returns from debt funds are comparable to those with other debt options. But if the interest rate changes, the debt fund could give higher returns.

  • Flexibility
    Certain types of debt funds such as liquid funds are more flexible than fixed deposits. The amount can be withdrawn each month which is especially good for retired people living on a monthly income. Additionally, one can shift the money from debt fund to equity fund or any other scheme.

As compared to fixed and recurring deposits, Debt funds are certainly the better investment instruments if you want higher returns, but don’t want to expose your money to the higher risks and the volatility of the share market. You can also use Angel Bee’s ARQ Mutual Fund Investment Engine that helps you pick the right debt fund for your needs.

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