A debt fund is considered a type of mutual fund scheme which invests in various fixed-income instruments. For example, Government and Corporate Bonds, money market instruments, treasury bills, corporate debt securities, and more that provide capital appreciation. Therefore, such funds are also called Bond Funds or Income Funds as they provide stable returns with less volatility. Besides that, through such funds, organisations borrow money from their investors with regular and stable interest payments. As per the 2023 budget, taxes are present in debt mutual funds which are applicable as per slab rates.

Debt Mutual Funds and its types

Based on the risk factors and investment objectives Debt Mutual Funds come under various types such as:

Gilt Funds: Gilt fund only invests in state and central government securities. It has a medium to long-term maturity period with lower risk  

Liquid Funds: These are considered short-term funds with a few-day maturity period, up to 91 days. Investments in liquidity funds include certificates, commercial papers, treasury bills, and more.   

Dynamic bond funds: They invest in different fixed-income assets with variable maturities. Such funds move across short-term and long-term funds dynamically. Hence, such bonds provide flexibility to the investor to decide overall portfolio duration. Therefore, it has a high sensitivity to the changes in interest rate.

Money market fund: Such fund provides open-ended schemes with a maximum 1-year maturity and a high degree of security. After that, money market funds focus on investing in highly liquid securities. It contains cash equivalents, debt-based securities, and cash.  

Corporate Bond funds: It is a type of mutual fund where 80% of the total financial resources are invested in corporate bonds of companies which are higher-rated. Corporate bond funds tend to provide better returns in comparison to Bank Fixed Deposits in a similar duration.  

Fixed Maturity Plans (FMP): FMP is a closed-ended, debt-based mutual fund, which is considered the most secure form of investment. It provides predictable returns as it has a fixed lock-in period that may stretch based on the selected scheme.  

Benefits of Debt Funds 

This type of fund provides relatively stable returns which makes it ideal for investors. Then, it provides relatively reasonable safety and less volatility which are other benefits. It has high liquidity which generates less risk than equity funds. Besides that, the availability of diversified funds helps to reduce volatility by spreading the risk factors. Another benefit of such funds is they provide steady income with high liquidity. Using such benefits investors can quickly redeem their investments.      

Overview of debt fund taxation 

As of 1 April 2023, debt mutual funds are fully taxable as per slab rates. A 20% tax is noted in case of Long-Term Capital Gains or when the debt mutual funds are sold after 3 years or 36 months. Then, Long-Term Capital Gains which are less than 3 years are taxed based on the slab rate of income tax of the investors.   

Comparison between debt and equity funds

Both debt and equity funds are known as mutual funds but have significant differences in terms of investment, return, and risk factors.

Investment: Long-term investments are effective in equity funds, and short—or medium-term investments are better for other funds. Moreover, equity funds involve selling a part of an organisation’s equity, but debt financing involves borrowing an amount.  

Return: Equity funds provide a higher return in long-term investments, but they also have higher volatility. On the other hand, debt funds provide lower returns with higher stability compared to equity funds. 

Risk factors: Debt mutual funds have lower risk factors than equity as they provide stable income and fixed-return securities. Some related risks with equity funds are Currency fluctuation risks, Interest rate risks, credit risks, Liquidity risk, Counterparty risk, risk of inflation, and more. Therefore, some risks associated with debt funds include Diversification risk, Prepayment Risk, risks related to changes in interest rates, and more. Hence, debt mutual funds are less risky than equity funds.     

Explanation of corporate debt fund 

Corporate-based funds are also known as a type of mutual fund through which investors invest in bonds that are issued by various organisations. Hence, such funds lend at least 80% of their assets to various organisations with the highest credit rating. Corporate funds aim to deliver capital appreciation and regular income to investors. Nonetheless, a credit risk is connected with the corporate fund due to users’ ability to pay back their debt. Moreover, corporate debt is known as a bond. Moreover, using such bonds organisations or corporations lend their money.    

How to invest in debt funds? 

There are some basic stages to invest in such type of mutual funds such as:

1. At the very first stage doing a consultation with a financial expert regarding the available funds, their benefits, and risk factors is essential
2. Then, the selection of a fund initially based on return stability, investment goals, risk factors, and benefits is needed 
3. After that a mutual fund account needs to be opened using an online platform and the account must be registered with a fund house.
4. The next stage is the initiation of the investment process and before that, the investment amount must be decided and arranged
5. After making successful investments, regular monitoring is essential and the investors need to change their investment objectives or portfolio based on market trends, volatility, and other changes.