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Understanding the potential of debt funds


Debt Mutual funds bring stability to the portfolios, providing a regular income, and also diversifying the portfolio beyond equities. Should you invest in them? In this article, we will cover everything about debt funds

What are debt funds?

Debt funds are mutual funds that invest in fixed-income securities. They are a very low-risk tool.

Debt fund portfolio includes a blend of bonds and money market instruments.

Types of Debt Funds

Debt funds can be categorized into following types of Debt funds:

Corporate Debt Funds

Corporate Debt Funds are a type of investment that is focused on lump sum allocations in the bonds issued by corporations. Such revenue sources provide the potential to diversify your investments across credit qualities and risks. 

Government Securities Funds

Government Securities Funds typically consist of government bonds, which are securities that allow investors to invest in high sovereign credit quality tools. Government Securities Funds seek to provide incomes which are consistent in nature since government bonds are low risk assets.

Liquid Funds

Liquid Funds  generally invest in the short to medium term in fixed income securities such as Treasury bills, commercial papers, and certificates of deposits. They provide high liquidity meaning that investors can access their funds at any time. Liquid Funds are the best short-term options for investing excess cash.

Dynamic Bond Funds

Dynamic Bond Funds are actively managed types of funds, which tangibly change the duration of their portfolio according to the direction of interest rates. These funds target a varying allocation between short-term and long-term bonds to capitalize on and benefit from different interest rate situations. 

Benefits of Investing in Debt Funds

Here are the benefits of debt funds. 

Capital preservation

The main function of debt funds is the preservation of capital. Through the allocation of low-risk debt securities, these funds strive to outperform other investment strategies, indicating that they are worth noticing by investors who are interested in preserving the initial amount of investment as well as yielding a little income.

Regular Income Generation

A regular income generation is one of the key advantages of debt funds, especially for those categories of investors who seek a steady cash flow. A stable and persistent revenue stream will most likely suit and attract the attention of the retirees or people who need to cover the cost of living with additional sources of income.

Diversification Benefits

Diversification in debt funds is to invest across different fixed-income securities to cushion the investors exposure to the risk. Such diversification is already reached by investing in bonds of various types, e.g. government, corporate, and municipal bonds, that help the investors to reduce the concentration risks. However, you need to check capital gains debt mutual funds to make a decision. 

Considerations for investing in debt funds

The following points should be considered before investing in Debt funds:

Debt fund interest rate sensitivity: 

Debt funds have a high sensitivity to changes in interest rates, which may affect the prices of bonds resulting in lower or higher returns.

Risk factors: 

Investors must factor in the concept of credit risk, liquidity risk, and market risk connected with debt funds prior to financing their investments


If the bond maturity of the fund is longer they may suffer more in comparison with short-term bonds when rates go up.

Investors need to consider this factor to make an investment decision. 


Debt funds provide a suitable opportunity for the diversification, generation of income, and preservation of investor money. However, for that, it is important to know the structure, types, benefits, and taxation of debt funds in order to meet financial objectives. To learn more about mutual funds, visit StockGro!


What types of investors are debt funds suitable for?

Debt funds suit investors who wish for steady earnings and with little risk.

What can be the use of debt investment apart from benefits?

Debt funds provide safety of wealth along with periodic income distribution and diversification which make them attractive for an investor with low risk-taking appetite. 

How are debt fund returns generated?

The revenues of the bond funds mainly consist of periodic interests paid by direct bond holdings. This is how these funds generate returns.

What are some popular debt funds in India other than the top ones?

Some other popular debt funds in India include:
Franklin India Low Duration Fund
DSP Ultra Short Fund
Kotak Corporate Bond Fund
UTI Treasury Advantage Fund
IDFC Bond Fund – Short-Term Plan

What is the debt fund taxation treatment?

Debt funds are required to pay capital gains tax once they realize gains by selling the fund units, with the tax rates that depend on the holding period and application of dividends.

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