Sharekhan Blog

Know Debt Funds Basic Types & Benefits

  • Apr 18, 2024

Compared to stocks, these funds provide investors with a more predictable return on their investment while carrying less risk. We shall explore debt fund meaning in this blog post, covering the many kinds and their advantages.

What are Debt Funds?

It is a kind of mutual fund scheme that makes investments in money market instruments, corporate debt securities, government bonds, and other fixed-income assets. These funds are ideal for investors looking for a comparatively steady and predictable source of income because they are professionally managed by asset management companies (AMCs).

Debt funds are renowned for their liquidity, which makes it simple for investors to acquire and sell units. They also provide diversification across a variety of debt instruments, which helps reduce risk.

Debt funds are a flexible option for a range of investment goals and risk profiles because their returns are derived from interest income and capital appreciation, and their taxes are contingent upon the length of the holding term. These funds are sometimes referred to as bond funds or income funds.

Debt Fund Types

The types of debt funds are based on maturity period. They are: -

1.Short-Term Funds

Short-term debt funds, as the name implies, have a shorter maturity duration of one to three years. They make investments in debt, money market instruments, and government securities. People with modest to moderate appetites for risk might benefit most from short-term debt funds.

High-interest rates are ideal for the performance of these funds. Short-term funds can be an excellent investing option if you have money to invest for nine to twelve months and have a low-to-moderate risk appetite.

2. Income Funds

Income debt funds primarily make long-term investments in debt instruments having a range of maturity dates. Income funds typically mature after five to six years. Income funds make investments in corporate bonds and government securities while accounting for fluctuating interest rates.

Therefore, investing in income debt funds may be most appropriate for people with longer investment horizons and a slightly higher risk tolerance.

3. Liquid Funds

It invests in debt instruments with a maturity date of fewer than 91 days. They offer stable returns with low NAV volatility, making them appropriate for investors looking to lodge excess capital for a few days temporarily.

4.Low-Duration Funds

These funds offer respectable returns at a modest risk. For individuals wishing to invest for a period of six months to a year, they are helpful. To increase yields, a portfolio might contain bonds with a lower credit rating.

5. Dynamic Bond Funds

Bond funds are classified as dynamically shifting between short-term and long-term funds with varying maturity characteristics. The money is allocated among all debt and money market instruments while accounting for changing interest rates. Those with risk tolerances ranging from moderate to high should think about investing in dynamic bond funds.

An investor with a medium-to-high risk tolerance may want to look into dynamic bond funds.

6.Gilt Funds

Only securities issued by the federal and state governments are purchased by gilt debt funds. There are medium- to long-term maturity periods. Because gilt funds are debt funds issued by the government, your capital is safe, and there is no credit risk. Government securities are susceptible to fluctuations in interest rates. Therefore, gilt funds do not come without risk.

Gilt funds are appropriate for people who want government-backed investing options and are prepared to make long-term investments.

Also Read about Can Mutual Funds Be Traded like Stocks?

Advantages of Debt Funds

Debt funds are a popular option among investors because they offer a number of advantages. Let's examine a few of these advantages: -

1.Regular Income

Debt funds are a desirable choice for investors looking for a consistent flow of income because they provide interest payments on a regular basis.


Debt funds offer investors a diversified portfolio and lower concentration risk by investing in a range of fixed-income assets.

3.Lower Risk

Debt funds are seen as lower-risk investments than equity since they are less susceptible to market volatility. Because the government backs them, government securities also offer an additional degree of security.


Due to the high degree of liquidity that debt funds provide, investors can purchase and sell units at any time, which makes it simpler for them to access their money when needed.

5.Tax Benefits

By indexation, investors can receive tax benefits if they hold debt funds for a duration longer than three years. Due to their ability to lower capital gains taxes, debt funds are a desirable investment choice for individuals looking for tax-efficient returns.

The Bottom Line

Debt funds are a popular option for investors since they provide a steady and less erratic investment than equity. Investors can choose the debt fund type that best matches their investment objectives and risk tolerance by being aware of the various kinds available and their advantages. All investments, meanwhile, come with some level of risk, so it's important to keep that in mind and speak with a financial counsellor before making any decisions.

Team Sharekhan
by Team Sharekhan

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