Debt Funds in India

Debt Funds in India

What are Debt Funds in India?

Debt Funds are investing money in fixed income instruments like bonds, G-sec's, commercial paper, certificate of deposits(CDs), treasury bills, or money market instruments. Debt funds are ideal for investors who look for regular income without risk. As these investment plans are volatile and are less risky when compared with equity funds.The returns in debt funds are not guaranteed, but they allow to profit decent returns as they allow investing in different security classes. These types of funds are suitable for the short-term and medium-term investment horizons.

What are the categories of Debt Mutual Funds?

  • Income Funds
  • Gilt Funds
  • Liquid Funds
  • Ultra Short Term Funds
  • Fixed Maturity Plans(FMP)
Category Income Funds Gilt Funds Liquid Funds Ultra Short Term Funds Fixed Maturity Plans (FMP)
Invest In Bonds/corporate debentures/government securities or any debt elements All government issued bonds or securities Money market instruments like CP,CD, Treasury bills, inter bank call money market, etc. Debt Securities such as CP,CD, bonds Fixed income securities
Term Period 3 to 5 years 3 to 5 years 1 day - few months Few months - 1 year 3 years & above
Risk Factor Medium to high risk High interest rate risk & Zero Default Risk Very low Low Low-Medium
Who should invest Who can tolerate with high risk tolerance Who can tolerate high volatility of interest rates as bond prices fluctuate highly Who seek better returns without relaying on interest rates offered by banks Who seek better returns without relaying on interest rates offered by banks Who likes to invest money for a fixed period

What are the things to be considered before investing in Debt Funds?


Debt funds have a higher risk as the interest rates fall on predictable rage than FDs.


They do not offer guaranteed returns, with the rise of overall interest rates in the economy the debt funds fall.


A charge fee called expense ratio is applicable to the investor's money as a maintenance charge

Investment Horizon:

Short-term investment horizon (3 months to 1 year) go for Liquid funds and Intermediate Horizon(3 to 5 years) go for Dynamic bonds.

Financial Goals:

  • Debt funds are an alternative source of income
  • Budding investors can invest for liquidity
  • Retirees can gain pension and retirement benefits by the investment in debt funds

Tax Gains:

The tax rate is directly proportional to the holding period, that is if the holding period is long then it will offer higher tax gain and vice-versa.

  • Short-Term Capital Gain (STCG) - A capital gain of a period of fewer than 3 years
  • Long-Term Capital Gains (LTCG) - Capital gain above 3 years or more

What is the process to invest in Debt Funds?

  • Step 1 - Fill the physical form or visit the website of the fund house
  • Step 2 - Click on the long to fill in the details
  • Step 3 - Provide all the requested details
  • Step 4 - Provide investment amount and the maturity period
  • Step 5 - Complete e-KYC
  • Step 6 - Invest in suitable debt funds
  • Step 7 - Log out once finished.

List of Top Debt Funds in India 2020:

  • Aditya Birla Sun Life Floating Rate Fund
  • DSP Government Securities Fund – Regular Plan-Growth
  • Edelweiss Government Securities Fund Regular Growth
  • L&T Triple Ace Bond Fund Growth
  • Reliance Income Fund-Growth Plan

Bottom Line:

Debt funds are safer for investments as they do not have exposure to equity shares. But they give negative returns when the interest rates rise. Though they offer high liquidity and flexibility for the investor, but to profit better returns the longer horizon are better options for investment.