Debt Funds Unveiled: Are You Missing Out on These Hidden Gems?


Similar to different clothes for separate occasions, various mutual fund types are available for varying risk appetites and goals. Just like you would not wear something informal for a formal situation, you should not invest topmutual fund scheme that does not align with your financial goals and risk appetite. Debt funds are considered the least risky of the numerous mutual fund investment options. Often, experts recommend these mutual funds to investors with a low-risk tolerance.

What are debt funds?

Debt or bond funds are mutual fund schemes that invest in fixed-income securities. Bonds, T-bills, debt, and other money market instruments are examples of fixed-income securities. These funds are less volatile and generate stable returns, unlike equity funds. While debt funds generate lower returns than equity funds, there are several reasons why you should invest in debt funds. A few of them are:

Low risk:

Conservative investors with a low-risk appetite seeking capital appreciation should invest in a debt mutual fund. As these funds invest in fixed-income securities with fixed rates of interest and maturity periods, they are not affected by market volatility. Adding debt securities to an equity-dominated mutual fund portfolio balances the risk-return profile. Debt funds serve as a hedge against market volatility if equity funds underperform.

Stable Returns:

Debt funds provide stable returns because their performance depends less on the market sentiments. Debt funds invest approximately 65% of their corpus in debt instruments like certificates of deposits, bond papers, debentures, and many more. Debt instruments do not fluctuate as quickly as stocks. As they are less sensitive to market movements, debt mutual funds may not generate high returns like equity funds. However, they also don’t fall as rapidly as equity funds either.


Debt funds are easy to liquidate. Meaning you can redeem your investments anytime you want. It is comparatively more liquid than other fixed-income investment avenues. For example, FDs have lock-in periods, and you are penalised on premature withdrawals. There are no such lock-ins. Therefore, debt funds offer high liquidity.

Apart from the three above, there are numerous other reasons why you should invest in debt funds. However, there are some things you must remember about investing in debt funds.

Debt fund investment tips you must follow:

Here are a few tips that you must follow if you are investing in a debt mutual fund:

Check risk tolerance:

Assess if your risk tolerance matches with the risk profile of the mutual fund variant. If you seek a low-risk mutual fund type, consider investing in debt funds. Contrarily, if you have a high-risk tolerance, look at equity funds.

Assess the interest rates:

You should choose a debt fund after assessing the interest rate movements. For example, if you think that interest rates will fall, focus on long-term debt or gilt funds. If you feel interest rates will rise, either stick to liquid funds or invest in floating-rate funds. A word of caution! Contact a financial advisor before assessing interest rates because it is a complex study.

Determine time horizon:

Determining the time horizon is also imperative. If you want to redeem your investments within a year, choose a short-term debt fund or a liquid or ultra-short-term fund. On the other hand, if you are investing for the long term, invest in a long-term debt mutual fund where instruments will mature over five years.


Debt funds are a safer option for risk-cautious investors. Debt funds are for investors comfortable with stable returns over high-risk capital exposure. These funds might protect your returns against market volatility. That’s because they invest in fixed-income securities.

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