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Guide to Debt Funds. | Company Vakil

Fixed interest generating securities like the government securities, treasury bills is where debt funds invests in .

The following is covered in this article:

  1. The working of debts funds
  2. People to invest in debt funds
  3. Varieties debt funds types
  4. Investment considerations tips
  5. Debts funds investment process
  6. India’s top 5 debt funds
  1. The working of debts funds

Giving a loan for interest to a person is the same as buying a debt instrument. The reason for investing with debt funds is to get interest income and increase of capital. The duration after which the debt securities is decided along with the interest that you earn. Thus the name fixed income  is set because you know exactly what you are going to get out of them .By diversifying different type of securities, debt funds try to optimize returns. There is no guarantee of returns but this allows them to earn a decent returns.

Debt funds returns are much safer because they can be predictable in a certain range .Depending of the credit ratings debts funds invest different securities. Security credit shows either the issuers will make the promised payments .High credit quality instruments is ensured by the fund manager of a debt fund. The entity is likely to pay interest on the debt security often .This is what we call higher credit rating.

As compared to low rated securities the debt funds which invest in higher rated securities will be less volatile. The maturity varies on the investment strategy of the fund manager and the interest in the economy .Low rate interest makes the manager to invest in long term securities and vice versa.

  1. People to invest in debt funds

Conservative investors  are ideal for debt funds investment. They can both work for long term and short term investment.3 months to 1 year are for the short whereas 3 years to 5 yrs are for medium .As compared to keeping your money in a saving bank account, its ideal for short term investors to invest in debt fund like liquid funds. Liquid funds have a  higher returns percentage of 7-9%. Debt funds like dynamic bond funds for medium investor can be ideal to ride the interest rate volatility .Bonds funds offer higher as compared to 5-year bank FD .Monthly income plans maybe a good option if you want to earn regular income from your investment .

  1. Varieties Debt Funds types.

Debt mutual funds are of different types just as equity mutual funds .The main difference btw debts funds is the period of maturity of the investment. We have the following types of debts funds .

 a.Dynamic bond funds

The meaning of dynamic  bond funds is that the fund manger keeps on altering portfolio details according to changing interest rate regime .This dynamic bond funds have a period which is fluctuating average maturity.

b.Income funds

Income funds invest in securities that have longer maturity. It can also take a call on interest rates with different maturity and also invest in debts securities. Income funds are more stable than the dynamic bond funds .It takes an average of 5-6yrs of maturity of the income funds.

c.Ultra Short-Term Debt Funds and Short term debt funds

These are funds that invest in instruments with little time maturities, It takes an year to 3 years. Short-term funds are suitable for the investors who are conservative, interest rate movements can not affect in anyway

d.Liquid Funds

Not more than 91 days is there when liquid funds invest in debt funds. This makes them very safe. Rarely as liquid funds seen negative returns. These returns are good option to savings bank accounts as they give same liquidity and more returns. Many companies in funds offer ready returns on liquid fund investments through unique debt cards.

e.Gilt Funds

Gilt Funds are  only invested in government securities. Government securities come with a very low credit risk and high returns rates. The reasons is the government rarely defaults on the loan it takes in the form of debt instruments.  For risk-averse fixed income investors this makes gilt funds very suitable.

f.Credit Opportunities Funds

Its a new type of debt funds. Contrary to other debt funds, credit opportunities funds don’t invest regarding the debt instruments maturity. These funds get higher profits by taking chances on credit risks. These funds hold a less-rated bond that is accompanied with higher interest rates. Credit opportunities funds are more risky.

g.Fixed Maturity Plans

(FMP) That is fixed maturity plans are closed-end debt funds. These funds also invest in fixed income securities like government securities and corporate, but they are accompanied with a lock-in. All FMPs have a fixed platform where your money will be locked-in. This platform could be in years or months. Investments in FMPs can be made at the starting period. An FMP is same as a fixed deposit but performs superior, though it does not guarantee returns .

Debt Funds

4.Things to Consider as an Investor


Debt funds have more credit risk and interest rate risk which make Banks FD more safer . On risk credit, the fund manager can have a low-credit investment rated securities that has a higher chances of default. On interest risk rate , the bond prices can drop because of increase in the interest rates.


They don’t offer guaranteed returns even though the funds are fixed income. The Net Asset Value (NAV) of a debt fund seems to drop relative with a increase in the total interest rates at economy. moreover, they are perfect for a dropping interest rate regime.


Debt funds place an amount to organize your money which is called an expense ratio. Even up to now SEBI had suggested the higher limit in expense ratio to be 2.25%. When looking at the less returns produced by debt funds as looked different to equity funds, a long-term holding duration shall help in getting the money gone out inform of the expense ratio.

4.Investment Horizon

Investment in Debt funds can be made for a period of investment horizons. They have a short-term horizon of 3 months to 1 year, then liquid funds is a good option. On the other hand, short-term bond funds is allowed for a period of 2 to 3 years. If there is an intermediate duration of 3 to 5 years, dynamic bond funds are much appropriate. In short , the more the horizon, the higher the returns.

5.Financial Goals

Debt funds could be the best partner in your layout to succeed in your goals. debt funds can be used as different option of income to increase your income apart from salary. Furthermore, investors can put some amount in debt funds for  liquidity reasons . Retirees also can invest their benefits in the debt funds in order to get a good pension .

6.Tax on Gains

You earn capital gains which are taxable when you invest in debt funds . The rate of taxation depends on the time you invested which is the holding period. A capital gain produced in a period of 3 years or less is called Short-term Capital Gain (STCG). A period of 3 years or more is known as Long-term Capital Gains (LTCG). Investor’s income is added the STCG and taxed according to his income slab.

How to Invest in Debt Funds?

Investing Debt fund is easy and no papers involved.This are the process to start your investment journey:

Step 1: Sign in at

Step 2: Enter your personal information concerning the amount of investment and duration of investment

Step 3: Get your e-KYC done in less than 5 minutes

Step 4: Invest in your favorite debt fund from amongst the hand-picked mutual funds

Top 5 Debt Funds in India

You need to analyze the fund from different view point when selecting a fund. There are various ways in which can be used to get the best debt funds as per your requirements. moreover, you Have to maintain your financial goals, risk appetite in mind.

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