A fixed income or debt mutual fund scheme invests a significant portion of its portfolio in fixed-income securities like government securities (G-Sec), corporate bonds and money-market instruments (e.g. Commercial Paper (CP), Certificate of Deposit (CD) etc.).

 

Features & Benefits

• Aims to give Stable returns: The primary aim of debt funds is to earn interest income by investing in bonds and other fixed-income securities with relatively lower capital risk as compared to other asset classes e.g. equity. Investors can also benefit from capital appreciation if the market prices of the bonds rise. However, debt fund returns are market linked and there is no assurance of capital safety.
• Potential higher returns than traditional products: Though Fixed Deposits (FD) give assured returns, historically debt funds have outperformed bank FDs on an average over time.

^{Source: Advisorkhoj Research}

^{Returns as on 30th April 2020 - Returns are average for each category as classified by SEBI, returns over 1 year periods are annualized.}

^{Past performance may or may not sustain in future. The returns provided above are for category of schemes and does not in any manner indicate performance of any individual scheme of the Mutual Fund.}

• Variety of solutions for different investment needs: Debt fund investments offer solutions for different risk appetite and investment needs. You can invest in funds of low to moderately low to moderate risk profiles appetite and different investment tenures e.g. few days, weeks, months or 1, 2, 3 years or even longer. Some debt funds are also suitable for Systematic Transfer Plan (STP) in equity or hybrid funds.
• Liquidity: You can redeem open ended debt funds anytime. Unlike FDs which may charge penalties for premature withdrawals, there is no charge in debt funds if you redeem after exit load period. Some debt fund categories may not have any exit load at all.
• Tax efficiency: Interest earned in FDs is taxed annually based on your income tax slab throughout the term. In debt funds, your tax is payable only on redemption. Short Term Capital Gains (STCG) tax is applicable if the investments were held for less than 3 years and Long-Term Capital Gains (LTCG) for tenures of 3 years or more. LTCG are taxed at 20% after allowing for indexation reducing your tax outgo.

Types of Debt Mutual Funds

According to SEBI, there are 16 categories of debt mutual funds depending on their maturity or duration profiles, credit quality and type of instruments they invest in. We will discuss about some key debt fund categories in the table below.

^{*Macaulay Duration ** Check credit quality of scheme before investing}