What are Debt Mutual Funds and How Do They Work?

Debt mutual funds invest in fixed-income securities like government bonds, corporate debentures, treasury bills, and commercial paper. They are generally considered less volatile than equity funds and are suitable for investors looking for regular income, capital preservation, and short-to-medium-term investments.

How Do Debt Funds Generate Returns?

Debt funds generate returns in two ways: interest income (accrual) from the underlying securities and capital gains due to fluctuations in interest rates. When interest rates fall, bond prices rise, leading to capital gains for the fund. Conversely, when interest rates rise, bond prices fall, which can negatively affect returns.

Types of Debt Mutual Funds

• Liquid Funds: Invest in debt instruments with a maturity of up to 91 days. Ideal for parking surplus cash.
• Short-Duration Funds: Invest in debt securities with maturities between 1 and 3 years.
• Corporate Bond Funds: Invest at least 80% of assets in highly rated corporate bonds.
• Gilt Funds: Invest exclusively in government securities, eliminating credit risk.