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| June 24, 2021

What is Debt Fund: Meaning & Investment Opportunities

Savings and profits are an integral part of human life and with so many different types of schemes available today; people have the flexibility to choose according to their preferences. This piece focuses on debt mutual funds – what are they all about, their benefits and how to go about investing in them.

What is a Debt Mutual Fund?

The debt market is considered to be better and less risky than the other investment methods. It is said that those investors who have a lower risk tolerance should opt for investing in debt securities. In fact, there are several aspects in the debt market that helps in facilitating the buying and selling of loans that are given in exchange for interest rates.

Let us give you a more detailed explanation of what a debt mutual fund is – debt funds are defined as investments in securities that help in generating a fixed income like corporate bonds, government securities, treasury bills, commercial papers, and other such instruments in the money market. Keeping these instruments in mind, there are pre-decided maturity dates as well as interest rates that the investor can earn once the fund reaches its maturity term/date; hence, they are known as fixed-income securities.

Knowing what debt funds are in terms of mutual funds will help in making a more informed decision when it comes to investing in them. One of the best things about debt funds is that the returns are not affected by the market fluctuations; this gives them the advantage of being a low-risk investment option. Opting for a debt fund or debt security is often considered as lending money to the body that is issuing the instrument concerning it. They allow investors and buyers to earn a steady income and good capital appreciation. 

Working of Debt Funds

Now that you know what debt mutual funds in India are, let’s talk about how they work. Based on the credit ratings, debt funds can be invested in a variety of securities. The credit rating helps in indicating the risk of default that can be seen while disbursing the returns to the investor. Every debt fund is managed by a fund manager who makes sure to invest in high-rated credit instruments of the money market. Having a higher credit rating also means that the body is more likely to regularly pay interest on the debt security and also pay back the principal amount when the debt fund matures.

It is also said that debt funds with higher-rated securities are stable when compared to the low-rated ones. The maturity of the debt fund depends on the investment strategy that is planned by the fund manager as well as on the overall command of the interest rate in the economy. This is an important factor that you will come across while learning what a debt mutual fund is. If the interest rate regime falls, the fund manager encourages investment in long-term securities and if it increases, you will be advised to invest in short-term securities.

Types of Debt Funds

The types of debt funds that you can invest in are as follows: –

  • Income Funds

    In this type of debt fund, the attempt is to offer a stable rate of returns irrespective of the market scenario by having active portfolio management. It also allows the fund manager to choose a low-rated instrument that offers a potentially higher return for better gain.

  • Dynamic Funds

    While learning what the meaning of debt mutual funds is, you will definitely come across this.This is another type of debt security where you can invest in is a dynamic fund or dynamic bond funds. Herein, investors need to have an active and dynamic portfolio; a dynamic fund helps in maximising the returns by amplifying the investment portfolio based on the market condition and fluctuations. 

    Dynamic Bond Funds: Through active and ‘dynamic’ portfolio management, dynamic bond funds seek to maximize the returns to investors by switching up the investment portfolio depending on market conditions and fluctuations.

  • Liquid Funds

    This is another option that will come into the picture while you learn what a debt mutual fund is. If you are planning to invest in debt security with high-rated instruments – liquid funds are your deal. Investing in liquid funds helps in maintaining the highest degree of liquidity i.e. convertibility to cash or cash value. Liquid funds offer higher returns than saving accounts, making it a preferred choice for investors with extra funds.

  • Credit Opportunities

    Although these are known as a riskier type of debt funds; you can invest in them if you are willing to undertake calculated risks. Here, you can invest in a lower-rated instrument that will help in generating higher returns. When you search for what is debt funds in mutual funds and the types, credit opportunities may not show up at times because of the risks. However, this will let you invest in instruments that are rated low in value by anticipating the rise through market research and analysis. Credit opportunities debt fund involves risk but if it works; you will get the best returns on your investment.

  • Fixed Maturity Plans

    Many a time, investors look for investment plans that are strict in rules, which help them invest properly without worrying about anything else. While learning what debt mutual funds in India are; a fixed maturity plan is a must-to-know type. Fixed maturity debt fund is a classic example of the same. Here, the schemes have a lock-in period with the investment done only once in the initial period. Once the scheme matures, you will get the returns and it is said that if they generate positive results, your returns will be higher than expected.

    Other than these, you also have the option to choose between gift funds and short-term debt funds. There is also an ultra-short-term debt fund with a minimum risk exposure that you can invest in.

Investing in Debt Mutual Funds

After learning the meaning of what debt mutual fund is and its types – it is time to know who can invest in these debt funds. They say investors who are risk-opposed, usually, invest in debt fund schemes. There are also investors who are satisfied with a low but regular rate of returns and capital appreciation. However, if you are planning on investing in a debt mutual fund, check out the following factors –

  • You have funds that you can block for a while
  • You are willing to take a teeny tad bit of risk for the possibility of higher returns
  • You are satisfied with the small but stable returns
  • You are willing to supplement your income
  • You are fine with long-term debt security in case the interest regime rate falls.


While reading all about what is a debt fund in mutual funds, you will come across its benefits as well. Debt funds offer a plethora of advantages to the investors that make it a preferred choice nowadays. These include high liquidity, better tax gains, higher possibilities of better returns, and so on happen to be some of the benefits that various types of debt funds offer to their investors. If you are clear on what is a debt mutual fund and are willing to invest, go ahead and do so to build your corpus in the long term.

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