Debt Funds in India: Debt Funds Interest Rates, Benefits & Taxation

Mutual funds are among the most popular investment avenues in India. The rising popularity is mainly owing to their professional management, returns, and the fact that there is a mutual fund for everyone. Whether a risk-loving investor, a risk-averse investor, one who prefers investing sectorally, or one who likes to follow a particular stock market index, the vast array of mutual funds serves all. One such famous category of mutual funds is Debt Mutual Funds. Let’s explore debt funds in detail in this article.

What is Debt Fund?

Let’s now understand the debt funds meaning in detail. Debt funds are mutual fund schemes that pool money from various investors to put them in fixed-income securities. Fixed income securities are investment instruments that provide a fixed yield or interest rate.

Now, since there are varied fixed-income securities, there are various types of debt funds – 

1. Overnight Funds – These are debt funds which invest in securities maturing in 1 day like commercial papers and T-bills (Treasury bills). These funds feature shallow credit risk and zero interest rate risk.
2. Liquid Funds – This debt fund invests in securities with a maturity period of 90 days, like a certificate of deposit. These funds are subject to low credit risk and negligible interest rate risk.
3. Money Market Funds – These debt funds invest in securities that mature in up to 1 year. Moreover, these funds feature low risk.
4. Short Duration Funds – These funds invest in securities with a maturity period of 1-3 years. Quick Duration funds are suitable for investors of low to moderate risk appetite.
5. Medium Duration Funds – The maturity period of securities under these funds is 3-4 years. These funds carry moderate risk.
6. Long Duration Funds – These funds invest in securities maturing in more than 7 years. These funds come with a relatively high risk.
7. Gilt Funds – These funds invest in government bonds of varying maturities. These funds feature low risk.
8. Corporate Bond Funds – As the name suggests, these debt funds invest in corporate bonds. These funds are riskier than gilt funds.
9. Banking & PSU Funds – These funds invest in debt securities of banks, PSUs, and PFIs. They generally come with low risk.
10. Dynamic Funds – These funds invest in debt instruments of varying maturities and thus come with varying risk levels.

How Do Debt Funds Work?

Since debt funds are a type of mutual fund, they pool money from different investors, subsequently investing them in securities that provide fixed returns in the form of an interest income. These fixed-income securities also include bonds issued by medium-sized businesses, which are sometimes unavailable to individual investors. Thus, a debt fund serves as an investment medium for retail investors to invest in them. Let’s understand this better with the help of an example. Mr. A wishes to invest Rs. 50,000 in a debt fund, and his risk appetite is medium. Moreover, he does not need his investment to be highly liquid. Considering the investment profile of Mr. A, he can choose to invest in a medium-duration fund such as XYZ Strategic Bond Fund. Therefore Mr. A gets to invest in bonds through mutual funds.

How Can Debt Funds Help You?

Debt funds help you by adding a diversification factor to your portfolio, lowering your portfolio risk. They also allow you to enjoy a steady flow of income while bearing a low-moderate risk. You can quickly identify the risk level of a debt fund by checking its PCR Matrix.

The Class I Debt Funds feature Class the lowers interest rate risk, and Class III Debt Funds feature the highest interest rate risk. Similarly, debt mutual funds categorized as Class A carry the lowest credit risk, and those in Class C feature the highest credit risk

PCR Matrix: Mutual Fund Tool Mandated By SEBI 

In December 2021, the market regulator, the Securities and Exchange Board of India (SEBI), mandated that all fund houses provide a Potential Risk Class (PRC) matrix with all their mutual fund schemes. A PCR matrix of a debt mutual fund scheme features three interest rate rows – Class I, Class II, and Class III. It also has three credit risk columns – Classes A, B, and C.  

Benefits of Investing in Debt Funds

Investing is an essential element in the process of management of your personal finance. In this process, debt funds come in handy as they provide your portfolio with the required debt exposure and take advantage of diversification.

Here are some key benefits you can enjoy by investing in debt funds:

1. Fixed Returns – By investing in debt funds, you can enjoy a stable income flow in interest income
2. Safe Investment – Debt funds are safer than equity-oriented and balanced mutual funds. This is because here, the investment object is the generation of stable income instead of capital appreciation.
3. Liquidity – Debt funds are easy to liquidate compared to other fixed-income investment avenues like fixed deposits which come with a locking period.
4. Hedging Benefit – Another benefit offered by debt funds is that of hedging. You may include debt funds to your portfolio to add an element of diversification and lower its overall risk exposure.

How to Use Jupiter Money’s Return on Investment Calculator?

Jupiter Money’s Return on Investment Calculator is an easy-to-use tool that you can make use of by following the below-mentioned steps – 

1. Go to the official website of Jupiter Money.
2. Hover over the ‘Resources’ section in the top primary menu and click on ‘Calculators’ from the drop-down list.
3. You will see our complete list of calculators; select ‘Return on Investment’ from it.
4. Enter the amount you wish to invest.
5. Enter the amount of expected investment corpus.
6. Choose your investment period.

That’s all; once you fill all the required fields, a pie chart will be displayed on the left side of the screen with details like your investment gain, your return on investment, absolute return, and CAGR.

How Does Jupiter Money’s Return on Investment Calculator Help You?

Jupiter Money’s Return on Investment Calculator helps you by offering the following features: 

1. Profitability Measurement: With our Return of Investment calculator, you can instantly calculate the return on your investment. Since it is a computer-based tool, there are no chances of calculation errors, unlike manual calculations.
2. Quick Comparative Analysis: You can also use our Return of Investment calculator to draw a comparative analysis of different investments in your portfolio. The details like ROI, absolute ROI, and CAGR help you determine which investments align with your investment objective more than others.
3. Easy Decision Making: When you have all these essential details available, it is easier for you to make a fact-based decision for your investments. Basis the results shown by our Return of Investment calculator, you can decide if you wish to stay invested in it or would like to exit it.
4. Simple to Use: In addition to offering all of the above advantages, our Return of Investment calculator is also straightforward. All you need to do is enter your investment amount, investment duration, and expected rate of return, and you are done!

Conclusion

Debt funds are an ideal investment option if you wish to enjoy a steady flow of income while facing a relatively lower risk than equity and balanced funds. Moreover, mutual funds do somewhat better than traditional fixed-income investment instruments like fixed deposits in terms of returns and liquidity.

Also, a wide array of debt funds allows you to invest your hard-earned money in this investment avenue per your investment style and risk appetite. Debt funds are a great investment option if you are risk averse and want to enjoy a regular income flow without actively managing your investments. 

FAQs

1. Are debt funds risk-free?

No. Two types of risks come with a debt fund – credit risk and interest rate risk. However, this risk is shallow and sometimes even negligible with some debt funds like overnight and liquid funds. But, other debt funds like long-duration and dynamic funds feature a risk element.

2. What is SIP in Debt Fund?

SIP stands for a Systematic Investment Plan, a method of investing in mutual funds. If you opt for a SIP in a debt fund, you can invest small amounts at regular intervals instead of a lump sum amount.

3. How are debt funds taxed?

Short-term gains earned over a debt fund investment are taxed per your income tax slab. Long-term gains from a debt fund are taxed at a rate of 20% with indexation.

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Written and Reviewed by:

Priyanka Rao

Author

Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.

Prithvi Tejavath

Financial Content Reviewer

Prithvi Raj Tejavath is currently the Business Head - Investments at Jupiter Money, where he leverages his extensive experience in product marketing, business growth, and leadership. Prior to this, he held the role of Chief Product Marketing Officer and Chief Product Officer at Scripbox, a leading digital wealth management platform. His journey at Scripbox began after the acquisition of Upwardly, a company he co-founded, where he served as CPMO overseeing product and marketing. At Upwardly, Prithvi played a crucial role in making investment opportunities more accessible to a broader audience.

Before Upwardly, Prithvi was Vice President of Category Management & Growth at Urban Ladder, where he managed the P&L for their furniture, décor, and mattress divisions, and successfully launched the Decor and Mattress business units. Earlier in his career, he founded BuynBrag.com, India's first social shopping website focused on home and lifestyle products. Under his leadership, BuynBrag was acquired by Urban Ladder in September 2014.

With a background in online product management, growth strategy, and marketing, Prithvi has consistently demonstrated his ability to scale businesses and drive innovation across sectors. His entrepreneurial spirit and strategic acumen continue to shape his contributions to the financial and investment landscape.