Latest NorthEast India News | How do Debt Mutual Funds Work?

There are chances you can outlive your savings – so there is nothing better than the opportunity to compound your money over time by investing and reinvesting it. Although, the only barrier standing in your way when it comes to investing is – if you could get too greedy or get too scared. There is an in-between for the people fighting both of these strong emotions, and that is learning about debt mutual Funds.

What is the Meaning of Debt Mutual Funds?

Debt Mutual funds – the category of mutual funds that invest in debt and money market tools. These money market instruments are either of the following:

  • Non-convertible debentures
  • Treasury bills
  • Certificates of deposit
  • Government bonds
  • G-secs
  • And more.

What is the Primary Motive of a Debt Mutual Fund Anyways?

A debt mutual fund aims at getting income in the form of interest payments. Some of them even generate capital appreciation for investors. These funds generate returns through investments in bonds and fixed-income securities, and it is important for everyone to include debt mutual funds in their portfolio as a method of diversification or protection against the market’s volatility.

Why did we mention earlier that debt mutual funds would be a solution to the fear of investment or fear of greed – here’s why!

What Makes a Debt Mutual Fund a Great Investment!

– Parking your money for a day? A month? or a year? A debt mutual fund lets you choose how long you are invested.

– Is your risk high, low, or somewhere in the middle? All solutions are in one place; you can be the one choosing funds based on your risk appetite.

– Do you have a lump sum amount, or have a little coming in every few days – the one solution to both these ways of money flows is debt mutual funds.

Everything isn’t rainbows and sunshine all the time, right? Well, if we’re telling you the pros of something, is it right to close the book there? Obviously not! Here are the cons, which are much more important than the perks.

What are the Risks in Debt Mutual Fund Investments?

It’s important for an investor to know what he’s putting his money into – not just the good part, but the possibilities of a downfall too. What are the risks of a debt mutual fund?

Interest Rate Risks: A debt mutual fund is inversely proportional to interest rate changes, and if the interest rate decreases, returns of debt mutual funds increase and vice versa.

Credit Risk: A credit risk is the risk or debt security arising when an issuer fails to make payments. Varied credit agencies would assign a credit rating to bonds, and if the credit rating of an instrument falls, so does the price.

How to Overcome These Risks?

There’s a way to get about in every situation, isn’t there?

In the case of interest rate risk: It is only for a short span, as a period of falling interest rates is often followed by a period of rising interest rates. In this case, if you are invested for a longer period of time, you can simply overcome this situation.

In the case of credit risk: When an issuer defaults on payments, then the price of the instrument falls permanently, credit risk is somehow permanent, and it is the investors who will have to minimize the risk.

So, what are the categories of debt funds?

Debt Mutual Funds: The Categories-Based Type

A debt fund can suit a diverse set of investors, and the main reason is that it has various types; here are some of them you have to know:

1. Dynamic Bond Funds: As the name would suggest. These are dynamic funds; the manager keeps changing portfolio composition based on the fluctuating interest rate regime.

2. Income Funds: They are funds that take a call on the interest rates and invest predominantly in debt securities with longer maturities.

3. Gilt Funds: These are the kind of funds that invest only in government securities or high-rates securities with very low credit risk.

4. Fixed Maturity Funds: They are closed-ended funds that invest in fixed-income securities, such as corporate bonds.

Debt Mutual Funds: The Categories Based on Tenure

Debt mutual funds have comparatively lower risks than equity mutual funds; that’s a given. But they have various categories based on the maturity period, so here we go!

1. Overnight Funds: They invest in instruments maturing overnight and have no interest risk.

2. Ultra-Short Funds: They are low-duration funds, with a time period ranging from 3 to 12 months, and have low to moderately low-interest rate risk.

3. Short Duration Funds: They range in a period of one year to three years, and they also have moderate interest sensitivity.

4. Medium to Long Duration Funds: These are funds that range from four to seven years and are comparatively more sensitive to interest rates.

What is Your Takeaway from Investing in Debt Mutual Funds?

Here’s the good side of it:


They are invested in fixed-income securities, and the returns from investing here are stable when you can compare them to other kinds of funds.


When you diversify your portfolio with debt mutual funds, you help to stabilize your investment returns.


A debt mutual fund is an alternative to an FD in a bank. Investment in FDs involves a lock-in period, but through these funds, you can enjoy the benefits of extremely liquid investments.

Lower Volatility

Debt mutual funds carry lower risks and are much less volatile than other types of market-linked instruments.

Low Transaction Costs

Debt funds have lower transaction costs when it is compared to equity and other funds; they don’t incur TDS – and are taxed based on the holding period.


All this explained – Now, you can select a mutual fund that matches your investment goals. Also, when it comes to debt mutual funds, it’s up to you to choose your kind of debt mutual fund from all the different kinds of them.