Debt Fund — Mutual Fund Term Explained

A mutual fund investing in fixed income securities — bonds, G-Secs, commercial paper. Lower risk than equity but also lower returns.

Debt mutual funds invest in fixed income instruments: government bonds, corporate bonds, treasury bills, commercial paper and money market instruments.

Debt funds carry credit risk (issuer default) and interest rate risk (bond prices fall when rates rise). Since April 2023, debt fund gains are taxed at slab rates regardless of holding period.

Related terms

• Gilt Fund — A debt fund investing only in Government Securities. Zero credit risk since backed by the government, but significant interest rate risk.
• Liquid Fund — A debt fund investing in money market instruments with maturity up to 91 days. Very low risk, T+1 redemption, returns better than savings accounts.
• Credit Risk — The risk that a bond issuer defaults or is downgraded, causing the fund's NAV to fall sharply. Higher-yield bonds carry more credit risk.
• Interest Rate Risk — For debt funds: when interest rates rise, fund NAV falls. Funds with longer duration are most affected.

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