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A Beginner's Guide to Debt Mutual Funds

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Created on
May 9, 2023


What’s Inside

You may want to begin your investment journey but are unsure about the associated risks. If you have a low-risk appetite and insufficient savings, stock investments might not be ideal. However, debt funds can be the ideal option for you.

So, what is a debt mutual fund? It is a type of mutual fund which invests in fixed-income security like corporate bonds. These are less volatile and provide stable returns for all types of investors.

If you want to know more about debt mutual funds, continue reading this post.

How Do Debt Mutual Funds Work?

Debt funds put the investor's money into fixed-income securities and earned interest accordingly. Based on the credit ratings, these funds invest in various securities.

The fund manager determines the ideal security to get the best returns and continues the investment. If security has an impressive credit rating, it will likely provide stable returns.

In general, high-rated securities have low volatility, which indicates better incomes.

In addition, your return on investment will depend upon the fund manager's investment strategy. The investment decisions will be cost-efficient if the manager has substantial knowledge of the market and securities.

Your income will also depend upon the country's financial state. That's why it's best to properly discuss with your fund manager before investing. However, debt funds are always beneficial in long-term or short-term security investments.

Income Stability

Debt funds are popular among investors for offering a stable income upon investing. Having lower risks than the stock market or equity investments, you won't suffer huge losses. However, they are not entirely risk-free; you must invest according to your financial condition.

The primary advantage is that these funds invest in securities such as certificates of deposit, government bonds, money market instruments and commercial papers. Moreover, these mutual funds have a fixed interest and maturity date.

Thus, you will receive a guaranteed income after the specified maturity period.

If you need fixed returns and don't have sufficient funds to back yourself, debt mutual funds will be appropriate.

Debt Mutual Fund Taxation

Compared to traditional mutual funds, debt mutual funds are more tax efficient. Debt mutual fund taxation occurs when you redeem the funds and redemption proceeds. You don't have to pay TDS yearly on the interest you gain from these funds.

Moreover, the taxation rate depends upon the fund's holding period. If the period is less than three years, it is considered a short-term capital gain. According to the tax slab, you may have to pay taxes for these gains.

Similarly, gathering capital gains after a holding period of over 3 years is called long-term gain. The taxes applicable here are 20% after their indexation.

High Liquidity

Debt funds provide an excellent rate of liquidity, which sets them apart from traditional funds. You can withdraw your money anytime you need, according to your requirements. There are no stringent lock-in periods or exit loads, adding to their convenience.

Summing Up

Even if you’re selecting the best debt mutual funds, understand the terms first. Consider the associated risks, return on investments and the current market situation before investing. Also, factor in the expenses for the fund manager that can impact your overall investment expense.

For enjoying commission-free investments in mutual funds, try Fi Money. The platform has a user-friendly interface to select over 800 mutual funds and invest through SIP or other methods.

Frequently Asked Questions

What are debt mutual funds, and how do they work?

Debt mutual funds invest in securities where the income is fixed and offers stable returns to investors.

What are the benefits and risks of investing in debt mutual funds,

The benefits of debt funds include stability, low risks and low volatility. Market fluctuations can cause some interest risks with these funds.

What are the different types of debt mutual funds, and how do they differ?

The types of debt funds include fixed maturity plans, dynamic bond funds, income funds and liquid funds. They differ based on their investing instruments and maturity period.

How can investors analyse and select debt mutual funds, and what factors should they consider?

The factors to consider before selecting debt mutual funds include risks, returns, financial objectives, taxes and fund manager expenses.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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