What is a debt fund with an example?

Debt Funds are types of Mutual Funds that generate returns by lending your money to the government and private companies. For example, Banking and PSU Debt Funds lend to Banks and Public Sector Units only.

Are debt funds risk-free?

There are Debt Funds with negligible or near-zero risk. Overnight Funds and Liquid Funds are examples of Debt Funds with extremely low. However other Debt Funds categories do carry risk. So always check before investing.

Which debt fund is best?

Selecting the best debt fund will depend on your investment horizon. If you want to invest for 1 day to up to a month then opt for Overnight Funds or Liquid Funds. For up to 6 months, Ultra-Short Duration Funds. For 6 months to 1 year time period, Money Market funds. And if the investment horizon is between 1 year and 3 years, you can go for Corporate Bond Funds, Banking & PSU Bond Funds, or Short Duration Bond Funds.

Is it good to invest in debt funds?

Investing in debt funds is a good option when you want to preserve your capital and at the same time want to earn better post-tax returns than FDs. It is also a good option to fulfill your near-term goals.

Is it good to invest in a short-term debt fund?

Yes, it is good to invest in short-term debt funds . In fact, it is advisable to invest in short-term debt funds for your near-term goals, as the value of long-duration funds is likely to fall more when there is an increase in interest rate.

Which debt funds are safe?

Overnight Fund is the safest among debt funds. These funds invest in securities that are maturing in 1-day, so they don't have any credit or interest risk and the risk of making a loss in them is near zero. Liquid Funds are also among the safest categories, as they can only invest in debt and money market securities with maturities of up to 91 days. This reduces the interest rate risk and credit risk that these funds can take.

How do I choose a debt fund?

First, decide your investment horizon. This will help you select the right Debt Fund category. The next step is to pick a fund from the category. Go for a fund that lends to good companies and has a lending duration similar to your investment duration.

Do debt funds have a lock-in period?

No, debt funds do not have a lock-in period. Apart from higher post-tax returns, this is another advantage that debt funds have over FDs.

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Debt Funds

Debt Funds are a kind of Mutual Funds that generate returns by lending your money to the government and companies. The lending duration and the kind of borrower, determine the risk level of a Debt Fund.

Debt Funds can be considered for an investment horizon of 1 day to up to 3 years
They offer better post-tax returns compared to FDs if you stay invested for at least 3 years
Liquid Debt Funds are a great option to park your emergency funds. You can earn better returns than savings bank account without taking too much risk

Types of Debt Funds

Funds to park money

Overnight
For up to 1 week
Liquid
For 1 week to 1 month
Ultra Short Duration
For 2 to 4 months

Long term debt

Medium to Long Duration
For 3 to 5 years
Long Duration
For 5 years or more
Dynamic Bond
Lends based on interest rate movements
Long Debt Index
Long-term passive funds for debt investments

Short duration

Low Duration
For 3 to 9 months
Money Market
For 6 to 12 months
Short Duration
For 1 to 3 years

Government backed

Gilt
Invests primarily in government securities
Gilt with 10 year Constant Duration
Invests passively in government securities.

Medium term debt

Medium Duration
For 2 to 4 years
Banking and PSU
Lends only to Banks & PSUs
Corporate Bond
Lends to Safe & Sound Companies

Others

Target Maturity
Index funds for debt investments
Credit Risk
Invest at least 65% in not-so-highly rated securities
Floater
Invests at least 65% in floating rate-bonds
FMP
Invests in Fixed Maturity Plans
Retirement Solutions
Invests primarily in debt papers for retirement solutions
Tax Efficient Income
Invests in debt and arbitrage funds
International Debt
Invest in global bonds and fixed-income opportunities

Best Performing Debt Mutual Funds

Scheme Name	Expense Ratio	1Y Return
Axis US Specific Treasury Dynamic Debt Passive FoF #NA of NA in International Debt Unranked ETM Rank: App exclusive	0.14%	11.94% p.a.	Invest on App
Aditya Birla Sun Life Medium Term Fund #NA of NA in Medium Duration Unranked ETM Rank: App exclusive	1.56%	11.83% p.a.	Invest on App
DSP US Specific Debt Passive FoF #NA of NA in International Debt Unranked ETM Rank: App exclusive	0.26%	11.71% p.a.	Invest on App
Aditya Birla Sun Life US Treasury 3-10 Year Bonds ETFs Passive FoF #NA of NA in International Debt Unranked ETM Rank: App exclusive	0.2%	11.58% p.a.	Invest on App
Aditya Birla Sun Life US Treasury 1-3 Year Bonds ETFs Passive FoF #NA of NA in International Debt Unranked ETM Rank: App exclusive	0.2%	9.9% p.a.	Invest on App
Bandhan US Treasury Bond 0-1 year Specific Debt Passive FoF #NA of NA in International Debt Unranked ETM Rank: App exclusive	0.18%	9.28% p.a.	Invest on App
Nippon India Medium Duration Fund #NA of NA in Medium Duration Unranked ETM Rank: App exclusive	1.05%	8.83% p.a.	Invest on App
Kotak Medium Term Fund #NA of NA in Medium Duration Unranked ETM Rank: App exclusive	1.63%	8.11% p.a.	Invest on App
ICICI Prudential Medium Term Bond Fund #NA of NA in Medium Duration Unranked ETM Rank: App exclusive	1.37%	8.1% p.a.	Invest on App
Edelweiss CRISIL IBX AAA Financial Services Bond - Jan 2028 Index Fund #NA of NA in Target Maturity Unranked ETM Rank: App exclusive	0.37%	7.88% p.a.	Invest on App