July 15, 2024

A Beginner’s Guide to Understanding Debt Mutual Funds

A debt fund is a mutual fund that focuses on investing in fixed-income securities like corporate bonds, commercial papers, certificates of deposit, government securities, and other money market instruments. Debt funds can be less volatile than equity funds, making them an attractive option for investors seeking stability and having a lower risk tolerance.

What to consider before investing in debt mutual funds

  • Investment goal: Before investing, clarify your objectives. Make sure you understand why you are investing and what you hope to achieve. A well-defined goal will guide you in making informed decisions and selecting the most suitable debt mutual funds for your needs. 
  • Time horizon: Determine how long you intend to keep your money invested. Debt mutual funds can be ideal for short to medium-term investment horizons, usually ranging from 1 to 3 years. Nevertheless, depending on your needs, the investment period can vary from overnight to longer durations. 
  • Risk appetite: Evaluate your willingness to take on risk. Despite being generally stable, debt fund investments are still exposed to credit and interest rate risks. Select a debt mutual fund that aligns with your risk tolerance and financial objectives.

Various types of debt mutual funds

Depending on your investment goals and risk tolerance, debt mutual funds are categorized into different types. Here’s a look at some of the most common debt fund options:

  • Overnight funds: These funds invest in securities with a maturity period of just one day, providing a low risk, low returns, and highly liquid option for short-term investment.
  • Liquid funds: Liquid mutual funds invest in debt and money market instruments with a maturity of up to 91 days. They offer relatively lower risk than other debt funds and aim to provide steady returns for investors looking to park surplus cash temporarily.
  • Money market funds: These funds invest in debt instruments with a maturity of up to one year, aiming to provide returns and maintain high liquidity.
  • Banking and PSU funds: These funds invest at least 80% of their assets in debt instruments issued by public sector undertakings (PSUs), banks, and other public financial institutions. They aim to balance returns, safety, and liquidity, making them moderate-risk investments.
  • Corporate bond funds: These funds allocate at least 80% of their portfolio to higher-rated corporate bonds, making them suitable for investors with a low-risk appetite seeking regular and stable income.
  • Credit risk funds: These funds invest at least 65% of their assets in corporate bonds rated AA or below. They offer the potential for higher returns but come with higher default risk, making them suitable for investors able to tolerate more significant risk.

Benefits of investing in debt mutual funds

  • Relatively steady income: Debt mutual funds can be an excellent option for conservative investors seeking low-risk options. These funds primarily generate income through fixed-income securities, providing investors a stable income stream.
  • Liquidity: Unlike traditional investments like fixed deposits, debt funds can be easily liquidated on any business day, offering investors the flexibility to address urgent financial needs without hassle.
  • Portfolio stability: While equity funds may yield higher returns over the long term, they also carry higher risk. Incorporating debt mutual funds into your portfolio can diversify your investment and potentially lower your overall risk.

Who should think about investing in debt mutual funds?

Here are some types of investors who may consider investing in debt funds:

  • Conservative investors: Debt funds could be a suitable investment option for investors with a low-risk tolerance who want to minimize the possibility of losing their capital.
  • New investors: Since debt fund investments are relatively low-risk, new investors could begin their investment journey with debt funds. This can help them gain relatively steady returns without being anxious about market volatility before moving to higher-risk equity funds.
  • Short-term investors: Short-term investors can explore investing in debt funds rather than keeping extra funds in a regular savings account. This may offer the potential for better returns while still maintaining liquidity.
  • Medium-term investors: Debt funds often provide better returns than traditional investment options like Fixed Deposits (FDs). However, while FDs guarantee returns, debt funds are influenced by market volatility and may not offer assured returns.


Debt liquid mutual funds offer a range of options for investors seeking stability and lower risk than equity funds. By investing in fixed-income securities like corporate bonds and government securities, these funds aim to provide steady returns with relatively low volatility. Before investing, you must consider your investment goals, time horizon, and risk appetite to choose the most suitable debt fund for your needs. Whether you are a conservative investor, a new investor, or someone with short to medium-term investment goals, debt mutual funds can be a valuable part of a well-diversified investment portfolio.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.