What are Debt Funds?

What are Debt Funds?

Debt funds are such mutual fund schemes that invest in fixed-income securities such as Corporate Bonds, T-Bills, government securities, Commercial Papers (CP), Certificates of Deposit (CD), and other money market instruments. These instruments have a fixed interest rate and maturity date. They may be less volatile and ideal for relatively risk-averse investors.

What Are The Types of Debt Funds Available in the Market

  • There are numerous types of debt mutual funds available for investment. Investors can choose a fund based on their investment objective, risk profile and preferred maturity period.

    • Overnight Fund
      These funds invest in securities with a maturity period of 1 business day only. Overnight funds carry interest rate risk and minimal credit risk owing to a very short maturity period.
    • Liquid Fund
      Liquid Funds invest in debt and money market securities with a residual maturity of up to 91 days. The instruments are fairly liquid and have the potential to offer returns. Some liquid funds also provide an instant redemption facility, allowing redemption of up to ₹50,000 per day per investor
    • Ultra-Short Duration Fund
      Ultra-Short Duration Funds invest in money market instruments and debt securities such that the Macaulay Duration of the portfolio is between 3-6 months.
    • Money Market Fund
      Money Market Funds invest in money market securities with a maximum maturity of 1 year. This fund is a good alternative to park surplus money for the short term. It can also be used as an emergency fund as it is relatively highly liquid and has the potential to generate returns than traditional avenues.
    • Short Duration Fund
      Short Duration Fund invests in debt securities and money market instruments. These instruments typically have a maturity period of 1-3 years.
    • Banking & PSU Fund
      Banking & PSU Fund invests a minimum of 80% of its assets in Debt securities of Banks, PSU (Public Sector Undertakings), Public Financial Institutions and Municipal Bodies
    • Gilt Funds
      Gilt funds are mutual fund schemes that invest at least 80% of their assets in government securities with varying maturities. They are considered a good investment since the exposure is given to sovereign papers. This makes gilt funds a good investment choice for risk-averse investors.

Why Should you invest in Debt Funds?

    • 1. Independent: Equity markets are highly volatile in nature. However, Debt mutual funds may not be affected by the stock market's volatility. Investment in debt funds is not subject to any such fluctuations in the market.
    • 2. Liquidity: Debt funds provide a high degree of liquidity compared to most asset classes today. You can easily withdraw your investment from the debt fund based on your requirements.
    • 3. Flexibility:The investment tenure or horizon refers to the period of your investments. The tenure often ranges from a period as short as three months or can spread over three years. Debt mutual funds have a flexible investment horizon catering to any investment goal.
    • 4. Low risk: Debt funds usually carry lower risk. Unlike equity funds, an investment portfolio under debt funds may not be exposed to market volatility. However, they are not entirely risk-free.

  • Mutual Fund factsheet
    Mutual Fund factsheet
    Mutual Fund factsheet

  • What is the Taxability of Debt Mutual Funds

    The recent changes made in the Budget 2023 have led to some noteworthy modifications. As per the new laws, debt funds will no longer be eligible for indexation benefits while calculating long-term capital gains (LTCG). Therefore, the tax on capital gains will be levied based on the investor's income tax bracket, irrespective of the holding period of the fund.

  • Who should invest in debt funds?

    Debt mutual funds might be a good investment alternative if you are looking for any of the following:

    • You are new to the world of investments and unsure where to begin setting up an investment objective.
    • You are looking for short-term investments with a low level of risk.
    • You want your investment in fixed-income securities.
    • You have a stable income and are looking for ways to supplement your monthly income.

    Debt funds are available for all the required investment durations. Therefore, you should choose as per your investment tenure and financial goals. Whatever the reason, ensure that you invest according to your investment plan.

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Disclaimer: The views expressed herein are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information / data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risk and uncertainties that could cause actual results, performance, or event to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in the future. LIC Mutual Fund Asset Management Ltd. / LIC Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investment made in the scheme(s). Neither LIC Mutual Fund Asset Management Ltd. and LIC Mutual Fund (the fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipients before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.


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