What are Debt Mutual Funds? Meaning, Types, Benefits, Return & Taxation

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What are Debt Mutual Funds? Meaning, Types, Benefits, Return & Taxation

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money market

Estimate what you’ll need for margin money, which is usually 20 per cent of the home price. This is the possibility of the mutual fund house not having sufficient levels of liquidity to cater to the redemption requests. The turnover ratio is the percentage of a portfolio that has been “turned over” or replaced with other holdings in a given year. Higher turnover implies higher portfolio churning, leading to higher transaction fees, impacting fund’s returns. The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility. It is a type of FD where the interest is paid out periodically (monthly, quarterly, etc.) to the investor.

Yield to Maturity is a basic measure of returns on the fund. It calculates what the bond fund will earn through dividends plus capital gains. Normally, higher the YTM, the better it is for debt fund investors. There is a popular saying in Wall Street that “Gentlemen and governments prefer bonds”. Referred to by various names like bonds, debt and fixed income instruments, they essentially mean the same thing. Unlike an equity, which is an instrument of ownership of a company, debt creates a relationship of lender and borrower between two parties.

15% in liquid funds, 50% in corporate bond funds, 25% in medium term bond funds and 10% in long term debt funds. By keeping these credit ratings as a point of reference, debt managers take calls on which debt instruments to invest in. Gilt debt funds only invest in securities issued by central and state governments.

short term

Considered one of the most suitable https://1investing.in/ for short-term investments, liquid funds, as per SEBI, invest in instruments with a maturity of up to 91 days. As per SEBI, Overnight funds invest in those instruments which mature in just one day. They are funds with the shortest duration out of all debt funds.

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ETMutualFunds.com has put together a list of 35 debt mutual funds, spanning across different categories, to help investors looking around for safe funds. According to Morningstar, these schemes have been investing around 98% of their portfolio in the highest-rated or AAA-rated instruments for the last two years. Simply put, the have investments only highest-rated securities.

bond funds

While it is true that debt funds offer many risk-free investment options for an investor to choose from, it is highly recommended to check the expense ratios of all these risk-free funds. Gilt ETF is one of the instruments that offer a relatively lower expense ratio with higher returns in a low-interest rate regime. The value of a stock is ultimately determined by the forces of demand and supply. And so, the potential for upside for a stock is only limited by the demand for the said stock. Since these funds invest in fixed-income securities, there’s very little scope for wealth creation by capital appreciation.

What are the Advantages of Investing in Debt Funds?

If the investors are extremely cautious, these advisors have been asking them to stick to overnight funds and liquid funds. If the investors is extremely cautious, they have been asking them to stick to overnight funds and liquid funds. Before diving into debt funds, let us establish the meaning of debt securities. Debt or fixed-income instruments provide returns in the form of fixed regular interest payments and principal payment .

  • No TDS is deducted in hand of investors on returns in debt funds, but in FDs, if your interest exceeds INR 10,000 then it is subjected to TDS by the bank.
  • Duration risk subjects an investor to risk of drawdowns due to the marked-to-market impact on bond prices due to change in interest rates.
  • Many investors look for short term debt funds as an ideal way to park their additional funds as they provide better returns than a Bank Fixed Deposit.
  • A Liquid fund is suitable for investors who look for a short or medium duration investment and generally park their surplus money either in fixed deposits or saving account.
  • Debt mutual fund investment are a good investment option for investors who are looking to generate regular income for short to medium term.

Short duration funds, according to SEBI, are open-ended schemes with investments of a Macaulay Duration of 1-3 years. Debt Mutual funds are a safe component of a diversified portfolio, which can cushion it from the losses arising from riskier investments like equity funds and commodities. Here, you can invest small sums of money periodically in the debt funds of your choice. This method is suitable if you do not have a large sum of money, but have a stable source of income. Credit risk is the risk that the issuer of the debt instrument may default on their interest or maturity payments. Typically, government securities carry the lowest credit risk because they are backed by the government’s sovereign guarantee.

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The main intention of these funds is to generate wealth in the form of interest income and steady appreciation of the capital invested in the long run. The underlying assets generate a fixed rate of interest over the tenure for which investors stay invested in the fund. When it comes to debt mutual fund, there are short-term capital gains for a holding period of up to 3 year, and long-term capital gains for periods above 3 years. Instruments in liquid funds have a maturity period of maximum 91 days.

Fixed Maturity Plans Passively managed close-ended funds, where investments are held to maturity. An alternative to FDs with investment horizon of over three years. Long-Term Income Funds Medium to long duration funds with portfolio maturity between three and 10 years.

Indian bond markets lack depth and it is a task to find takers for low-rated papers even in a good market. Let us now understand the relationship between debt funds and interest rates. Hey, I have discovered this amazing financial learning platform called Smart Money and am reading this chapter on Understanding key characteristics of debt funds. Check if your risk tolerance matches with the credit profile of the fund.

If you are someone who fits into one of the categories described below, debt mutual funds might be an ideal investment option for you. Debt funds are a great investment opportunity if you know what to look for and what kind of debt funds to invest in. Debts funds are seen as favorable investment options because they attempt to deliver stable and low-risk returns that are better than other comparable options like fixed deposits. In short, a CaPrOF aims to safeguard the principal amount while offering a potential equity-linked capital appreciation.

Debt funds also allow you to take advantage of investing in equity market along with growth on your principal amount through Systematic Transfer Plan . With an STP, you can transfer amounts in parts/tranches from one mutual fund scheme to another, within the same fund house at regular intervals. Such a transfer averages the cost of purchase,mitigating some market-related risks. Typically, an investor first parks his funds in a liquid or a floating-rate debt fund and then transfers them via STP to the scheme of his choice at regular intervals. Money Market Fund – which invests in money market instruments with a maximum maturity of 1 year.


FMPs, as the name indicates, have a pre-determined maturity date and are close-ended debt mutual fund schemes. FMPs invest in debt instruments with a specific date of maturity, lesser than or equal to the maturity date of the scheme, also enjoy the status of debt funds. After the date of maturity, the investment is redeemed at current NAV and the maturity proceeds are paid back to the investors. For instance, if the interest rates are falling, short- to long-term bond and gilt funds would bode well. The different types of debt funds include overnight funds, liquid funds, income funds, gilt funds, dynamic bond funds, ultra short-term funds, fixed maturity plans, etc. Banking & PSU Debt Funds are safest option for conservative investors.

Debt mutual funds predominantly invest in fixed-income instruments such as treasury bills, corporate bonds, government securities, and other debt and money market instruments. This scheme will invest in debt and money market instruments with a Macaulay duration of three to four years. These funds have an average maturity period that is longer than liquid, ultra-short and short duration debt funds. Liquid Funds invest in short-term money market instruments such as treasury bills, commercial papers, term deposits, etc. They invest in securities that have a lower maturity period, usually less than 91 days. Liquid funds provide easy liquidity and are less volatile than the other types of debt instruments.

NAV of the selected fund will be sent on the next working day. If you already have a folio with Baroda BNP Paribas, start investing right away. The data or figures mentioned on the RankMF shall not be construed as indicative yields/returns of any of the variants or products of RankMF or SmartSIP. Average maturity of IDFC Government Securities Fund is 8.67 years. Average maturity of HDFC Short Term Debt Fund is 3.27 years.

This debt scheme mainly invests in floating rate instruments, where the interest paid changes in order with the changing interest rate scenario in the debt market. Floater Fund will invest a minimum of 65 percent of its total assets in floating rate instruments. An SWP under an MIP can work as a regular source of income for investors.

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You can select if you would like to make monthly payments or a One Time investment plans. You can mention the amount you are willing to invest and the number of years you would like to stay invested. You are looking for something that is short term with a low level of risk. This is probably the right time to introduce you to what is a debt fund. As a thumb rule, 3-6 month’s household expenses can be one’s emergency fund depending on the age. Roughly the amount that gives you the confidence to combat emergencies in your household should be enough.


Few example of debt fund Funds have given few percentage point better returns than other popular deposit schemes. Funds of shorter Macaulay Duration stay protected from these outcomes, though their returns can be lesser. This is because the longer duration exposes the investment to all negative and positive outcomes of an economic cycle. You can do everything from the Fi App, including p2p payments, fund transfers, bill payments, and more, with features to automate every action.