Why should you consider debt funds in your investment portfolio?

what is debt fund
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Debt funds are a category of mutual funds that primarily invest in fixed-income securities like bonds, government securities, debentures, and money market instruments. Unlike equity funds, which invest majorly in stocks, debt funds aim to generate potentially stable returns by lending money to issuers (corporations, governments, banks, etc.) in exchange for periodic interest payments and the return of the principal amount at maturity.

Debt funds are managed by professional fund managers who strategically select debt instruments based on their credit quality, duration, and prevailing interest rates. Additionally, there are different types of debt funds, each catering to a specific risk appetite and investment horizon.

  • Table of contents
  1. Types of debt funds to choose from
  2. Why should you invest in debt funds?
  3. FAQ

Types of debt funds to choose from

Liquid funds: Liquid funds are a relatively stable and liquid investment option. They primarily invest in short-term debt instruments with a maturity of up to 91 days.

Ultra-short duration funds: These funds invest in debt instruments with a slightly longer maturity period than liquid funds, such that the Macaulay duration is between 3 to 6 months.

Short-term debt funds: If you're looking for investments with a horizon of 1-3 years, short-term debt funds can be a suitable choice. They invest in a mix of short to medium-term debt securities.

Income funds: Income funds target investors with a medium-term investment horizon. They invest in a diversified portfolio of debt instruments, including government securities and corporate bonds, with varying maturities.

Dynamic bond funds: Dynamic bond funds are actively managed debt funds that adjust their portfolio duration based on interest rate expectations. This flexibility allows them to potentially capitalize on interest rate movements and generate relatively higher returns.

Gilt funds: Gilt funds exclusively invest in government securities (gilts), which are considered a relatively stable form of debt instruments in the market. They are suitable for risk-averse investors looking for stability of the corpus. However, they are subject to duration risk.

Fixed maturity plans (FMPs): FMPs have a predefined maturity date. They invest in debt instruments with matching maturities, thereby reducing interest rate risk.

Why should you invest in debt funds?

Relative stability and predictability

Debt funds offer a level of relative stability and predictability that can be comforting, especially for those with lower risk tolerance. Unlike equity investments, which can be highly volatile, debt funds aim to mitigate impact on capital.

Relatively steady cashflow

If you're looking to generate a potentially steady cashflow from your investments, debt funds can be a suitable option. Many debt funds distribute Income Distribution cum capital withdrawal (IDCW) at regular intervals, such as monthly, quarterly, or semi-annually.


Debt funds offer liquidity that is often superior to traditional fixed deposits. You can redeem your investment partially or fully at any time, depending on the fund's terms and conditions.


A well-diversified investment portfolio helps spread risk. By investing in debt funds alongside equity and other asset classes, you can achieve better diversification.

Professional management

Debt funds are managed by experienced fund managers who make investment decisions based on thorough research and analysis. These experts analyse market conditions, interest rate movements, and credit quality to optimize the return potential. Professional management of the fund can be beneficial, especially if you lack the time or expertise to manage your investments actively.

Inflation hedge

While debt funds may not provide the same potential for wealth creation as equities, they can serve as a hedge against inflation.

Risk management

Different types of debt funds offer varying risk levels , allowing you to tailor your investments to your risk tolerance. If you prefer low-risk options, you can opt for liquid funds or gilt funds. Conversely, if you're willing to take on more risk for potentially better returns, credit opportunities or dynamic bond funds may be more appealing.

Convenience and accessibility

Investing in debt funds is hassle-free. You can start with relatively small amounts, often as low as Rs. 1,000, and the process can be done either through a distributor, or online through various fund houses and investment platforms.

To conclude, debt funds offer an attractive proposition for investors seeking relative stability, cashflow, and diversification. Whether you're saving for a short-term goal, building an emergency fund, or balancing your portfolio with a mix of asset classes, debt funds can play a valuable role in achieving your financial aspirations.


What are debt funds, and how do they differ from equity funds?
Debt funds primarily invest in fixed-income securities like bonds and government securities. They usually seek to offer relatively lower impact of volatility to equity funds.

What are the advantages of including debt funds in your portfolio?
Debt funds can provide relative stability and diversification to your portfolio. They are particularly useful for conservative investors seeking less volatility on the invested capital.

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

This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.