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Debt Mutual Funds are a significant market where individuals invest to make returns on their hard-earned money. The debt market comprises various instruments that enable the buying and selling of loans in exchange for interest income. Considered safer than equity investments, many low-risk investors prefer debt securities. Generally, debt investments offer lower returns compared to equity instruments, although exceptions occur depending on market conditions.
How do Debt Funds work?
Each debt security has a credit rating that helps investors understand the likelihood of default by the issuer. Debt fund managers use these ratings and other factors to select high-quality instruments. A higher rating indicates lower default risk.
Do Debt Funds invest in lower-quality debt instruments?
Yes. Fund managers sometimes invest in lower-rated instruments to achieve higher returns.
Debt fund returns depend on prevailing interest rates and the fund manager’s decision to invest in specific debt securities to optimize returns.
Who should invest in Debt Mutual Funds?
Debt funds are recommended for low-risk investors. They usually diversify across different securities to aim for consistent returns. While returns aren't guaranteed, they typically fall within a predictable range.
Short-term investors (3 months - 1 year)
Liquid funds offer better returns than savings accounts without compromising liquidity.
Medium-term investors (3–5 years)
Low-risk investors may prefer security funds over fixed deposits due to generally better returns.
Kinds of Debt Funds
Based on maturity period and structure, debt funds are categorized as:
Overnight Fund
Invests in securities with 1-day maturity; extremely low credit and interest risk.
Ultra Short Duration Fund
Invests with Macaulay duration of ~3.5 years across money market and debt instruments.
Liquid Fund
Invests in 91-day maturity money market instruments; suitable for temporary parking of funds.
Money Market Fund
Invests in money market instruments maturing within 1 year for low-risk short-term investing.
Dynamic Bond Fund
Invests across varying maturities based on rate outlook; suitable for 3–5 year horizon.
Corporate Bond Fund
Minimum 80% invested in high-rated corporate debt; for low-risk, stable returns.
Banking & PSU Fund
Invests 80%+ in PSU and banking sector debt instruments.
Gilt Fund
Invests 80%+ in government securities; carries zero credit risk.
Credit Risk Fund
Invests 65%+ in lower-rated corporate bonds; high risk and higher return potential.
Floater Fund
Invests in instruments with floating interest rates; returns move with market rates.
Low Duration Fund
Macaulay duration of 6–12 months; suited for short-term predictable returns.
Short Duration Fund
Macaulay duration of 1–3 years; moderate risk, higher stability.
Medium Duration Fund
Macaulay duration of 3–4 years; suited for low-risk medium-term goals.
Medium to Long Duration Fund
Macaulay duration of 4–7 years; offers stability with modest returns.
Long Duration Fund
Macaulay duration over 7 years; very sensitive to interest rate changes.