Debt Mutual Funds – A Go Through

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Debt Mutual Funds

Debt is concerned as the major markets wherein people invest their hard earned money for making profits. The debt market consists of different instruments which facilitate buying & selling of loans in exchange for the interest. It is considered to be less risky as compared to equity investments, thus, investors with low risk tolerance prefer buying debt securities. Although, debt investments offer low returns when compared to equity investments. Let’s figure a bit more about debt mutual funds. Here: 

Debt Mutual Funds – Who are You? 

A debt fund invests in a fixed rate of interest generating securities like treasury bills, commercial paper, corporate bonds, government securities, and other market instruments. The main reason behind investing in debt funds is to earn capital appreciation and interest income. Based on their credit ratings debt funds invest in different securities. The credit rating of security signifies whether the issuer will default in disbursing the returns they promised or not. The fund managers make sure that he is investing in high-credit instruments; like said, high-credit means that the entity is likely to pay interest regularly on the debt security also pay back the amount of principal upon maturity.  

Debt Mutual Funds – The Working 

Each & every debt securityhas a credit rating that allows investors to understand the overall possibility of default by the debt issuer in expending the principal & the rate of interest. These ratings are used by debt fund manager(s) for selecting high-quality debt instruments.  

Who Should Invest? 

These funds are recommended to investors with low-risk tolerance & generally diversify across different securities just to ensure stable returns. Also, the returns are in an expected range because there are NO guaranteesThus, low-risk investors are perfect for debt mutual funds.  

Types of Debt Mutual Funds 

  • Dynamic Bond Funds: As the name states, the fund manager keeps changing the portfolio according to the fluctuations of the interest rate.   
  • Income Funds: These funds take a call on the rate of interest & invest pre-dominantly in debt securities with extended maturities. More stable than the dynamic bond. Also, the maturity of income funds is somewhere around 5-6 years.  
  • Short-term & Ultra Short-term Debt Funds: These funds are ideal for conservative investors as they are not affected by interest rate movements. They range from 1-3 years.   
  • Liquid Funds: Almost risk-free wherein the maturity is not more than 91 days. Its very rare liquid funds have ever seen any negative results. Also, these funds are good alternatives to savings bank accounts – providing the same liquidity with higher returns.  
  • Gilt Funds: These funds only invest in government securities – low credit risk & high rated securities.  
  • Fixed Maturity Plans: These are close-ended debt funds that invest in fixed-income securities like government securities and corporate bonds. However, they do not assure or guarantee high returns.  
  • Credit Opportunities Funds: These are new debt funds and unlike other types of debt funds, these do not invest according to the maturities of debt instruments. Also, credit opportunities funds are quite risky funds.  

Risks in Debt Funds 

There are three types of Risks. Here: 

  • Credit RiskIt is the default risk of the issuer not re-paying the principal & the rate of interest. 
  • Liquidity RiskThe risk carried by the fund house of not having any adequate liquidity to meet all the redemption interests. 
  • Interest Rate RiskThe effect of changing the rate of interest on the value of the scheme’s securities. 


Let’s present you with the top 4 debt funds as per Gulaq Methodology. Here:  

Debt Fund Name 
IDFC Bond Fund Medium Term Plan(G)- Direct Plan  
Axis Strategic Bond Fund(G) – Direct Plan 
Franklin India Income Opportunities Fund(G)- Direct Plan  
HDFC Medium Term Debt Plan(G)- Direct Plan  

*Investors may choose as per their goals & risk-appetite. Returns are subject to change.   


*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.

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