What Debt fund means to investors

What is a Debt Fund?

You can think of debt funds as mutual funds or exchange-traded funds that hold a lot of bonds. In a debt fund, you can buy short-term or long-term bonds, securitized products, money market instruments, or debt that changes its interest rate at a certain time. On average, the fees for debt funds are lower than those for equity funds because the costs of managing debt funds are lower.

Debt funds are sometimes called “credit funds” or “fixed income funds.” They are part of the “fixed income” asset class. These low-risk vehicles are usually sought by investors who want to keep their money safe and get low-risk income payments.

These are the most important things to remember.

  • There are many types of debt funds, such as mutual funds and They all have a lot of fixed-income investments as their main assets.
  • debt funds charge lower fees than equity funds because their management costs are already lower, which means that their fees are lower.
  • It’s possible for people who want to invest in debt funds to choose passive or active products.

The risk of debt fund

Debt funds can invest in a wide range of securities, with different levels of risk. U.S. government debt is thought to be the least risky. The risk profile of corporate debt that businesses use as part of their capital structures is usually based on the company’s

Investment-grade debt is money that is made by stable businesses with good credit. High-yield debt, which is mostly issued by companies with less-than-stellar credit and growth prospects, has a higher rate of return, but also more risk. People who borrow money also call it “developing market debt” and “emerging market debt.”

Investing in a debt fund

Investors can choose from a wide range of low-risk debt fund options, both passive and active, in both passive and active options.

Active Passive

Largest and most active passive fixed income funds try to mirror the top bond indexes, like the Bloomberg US Aggregate Bond Index and the ICE U.S. Treasury Core Bond Index, so that they can make money like these indexes.


There are also a lot of active managers in the debt fund market. They try to outperform debt fund indexes like the Bloomberg U.S. Aggregate Bond Index and the ICE U.S. Treasury Core Bond Index.

The First Trust Tactical High Yield ETF (HYLS) is an example of a debt fund that is actively managed. It invests for both income and long-term growth in value. On October 31, 2017, it’s been a good year for the NAV return. As of now, the fund isn’t outperforming its chosen index. It is, however, one of the best-performing funds in the US high-yield bond market.

Investors in debt funds should know how return calculations are used to show how well the funds are doing. Because debt funds make money, they may pay dividends on a set schedule every month or every three months. To get the total return, you have to account for income payments, but general return calculations may not.

Global Debt Funds

There are a lot of debt funds around the world.

Countries borrow money in different ways to support their government’s fiscal policies. In the United States, government-issued debt is thought to be the safest type of investment.

Many countries let people invest in debt to help their governments with their budgets. As the political and economic situation of a country changes over time, so do government debt funds’ risks and their returns. Similar to stocks, global corporate bond funds can be broken down into developed and emerging market indexes. Credit ratings are given to both government bonds and corporate bonds based on a globally agreed-upon credit rating analysis.

Who should invest in the debt mutual funds?

In general, debt funds are not good for risk-averse people. They’re good for people who aren’t ready to invest in stocks. There is little to no risk in debt funds, which help people build up their wealth. As a result, these funds also try to make money on a regular basis. Investors usually stay in debt funds for a short or medium amount of time.

You need to pick a debt fund that fits your investment time frame. Liquid funds might be good for a short-term investor who usually keeps extra money in a savings account. Liquid funds can be bought and sold quickly. Liquid funds have returns of between 7% and 9%. As a savings account, they also allow you to take money out at any time.

If you need to ride out the changes in interest rates, then dynamic bond funds might be a good choice for your money. These funds are good for people who want to invest for a while and get more money back than they would get from a five-year bank FD.

Taxation of Capital Gains of Debt Funds

Debt funds are mutual funds that have more than 65% debt in their portfolios. In the table above, you can get short-term if you sell your debt fund units after three years. They are added to your taxable income and taxed at your income tax rate, which is different for everyone.

When you sell units of a debt fund after three years, you make long-term capital gains. They are taxed at a rate of 20% after inflation, which is the same rate they would have been before. There is also a cess and a surcharge on the tax that you pay, as well.

Things to think about when investing in debt funds

This is a list of some things that should be taken into account before investing in debt funds.

  1. Fund Objectives

Debt funds try to get the best possible returns by the by investing in a wide range of stocks and bonds. You can expect these funds to work the same way every time. It is because of this reason that debt funds are good for people who aren’t very risky.

  • Fund Category

Debt funds can be broken down into different types, like liquid funds, monthly income plans (MIPs), fixed-term plans (FMPs), dynamic bond funds, income funds, credit opportunities funds, GILT funds, short-term funds, and ultra-short-term funds. These funds each have their own set of goals and benefits that they can help you achieve. You need to figure out what you need and invest in a debt fund that meets those needs.

  • Risks

Debt funds have interest rate risk, credit risk, and liquidity risk, which means they could lose money if the interest rate changes. The value of the fund may change because of changes in the overall interest rate. In any debt fund plan, you have to accept these risks.

  • Cost

Debt funds charge you a fee to manage your money. Only the Securities and Exchange Board of India (SEBI). can decide how much each fund house can charge.  The cost of mutual fund plans varies.

  • The Investment Horizon

Three months to a year is ideal for liquid funds. As long as you have a longer time-frame, you can look into short-term bond funds.

  • People who want to make money want to make these goals.

Debt funds can be used for many different things, like making more money or having more money available. They can also earn a lot more money than a regular savings account. You need to make sure that the debt fund scheme you choose meets your needs and the goals of the fund.