What is debt mutual fund?

What is debt fund or debt mutual fund?


Debt funds are mutual funds that invest in fixed income securities like bonds, treasury bills, money market instruments, etc. Various investment options include monthly income plans, short term plans, fixed maturity plans, GILT funds, etc. These funds also invest in short term, medium term and long term bonds. Debt mutual funds look to maximise returns by maintaining a diversified portfolio of investment. This ensures a greater spread of risks as well.

The return on investment can be broken into two parts-

1) Interest income

2) Change in market conditions leading to capital appreciation or depreciation of various securities in the portfolio

These funds are good for risk-wary individuals as they are not as volatile as compared to the equity market. The return on debt mutual fund is low when compared to that of equity.

One of the advantages of debt mutual funds is that these funds are highly liquid. An investor can withdraw his investments at any point of time. However, a high fees will be charged to the investor if he decides to exit the fund before a minimum time period.

The gains from mutual funds are free from TDS deductions. Tax is incurred on these funds as:

Short term capital fund tax: If the debt funds are held by the investor for less than a year, tax on these funds is calculated as per the tax bracket of the investor.

Long term capital fund tax: For debt funds held for more than three years, the interest earned is taxed at the rate of 20% with indexation with 3% cess.

Pijush Kanti Biswas

Debt fund is a mutual fund which invests most of the money gather from investors into fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificate of deposit, treasury bills etc. These mutual funds are best for investors who are risk aversive in nature, do not wish to invest in stock market and expect fixed return on investment. Both fixed deposits (FDs) and debt mutual funds are low-risk investment financial instruments and were used to be seen as comparable investment options. But recently major Indian banks, in both public and private sector, have revised the interest rates they offer on FDs. Country’s largest lender, State Bank of India (SBI), cut its interest rate on FDs to 6.90% for maturity period of 1-year and to 6.50% for maturity periods between 3 to 10 years, which is lowest in the industry now. In such a scenario, parking your cash in debt mutual funds is a wise investment.

 Various types of debt fund available in market are:

1. Gilt Funds

2. Income Funds

3. Monthly Income Plans(MIPs)

4. Short term funds

5. Liquid Funds

6. Fixed Maturity Plans (FMPs)

To know more about types of debt fund, visit:

No deduction of taxes or TDS on the earning from debt funds. Taxes to be paid only when an investor sell or withdraw fund units and depending on period of the investment. Taxation on debt mutual fund are of 2 types:

1. Short-term Capital Gain tax:

This is applicable on debt mutual funds held for a period of 36 months or less i.e. anything less than 3 years. In short-term capital gain tax, tax on funds is calculated as per income tax slab of the individual, i.e. 5%, 20% or 30% on the amount of gain.

2. Long-term Capital Gain tax:

This is applicable on debt mutual funds held for a period of 36 months or more i.e. anything more than 3 years. In long-term capital gain tax, tax on funds is calculated at the rate of 20% with cost indexation on the amount of gain. Indexation is the adjustment of your purchase price with respect to effect of inflation in an economy and helps you to pay low taxes on your capital gain.

So, debt funds are best suited for investors with surplus amount of money lying idle with them and interested in earning better returns than normal saving accounts or bank FDs with very low risk appetite risk.

Happy Investing!


Debt mutual funds are those funds which invest in a mix of debt or fixed income securities such as government securities, treasury bills, money market instruments, etc. Debt mutual funds try to increase returns by diversifying investment across different types of securities. The returns of these funds usually lie between a particular predictable range making them appropriate for conservative investors. These returns consist of two things- interest income and capital appreciation/depreciation in the value of the security due to changes in the market. A debt fund is highly liquid since it allows you to withdraw any time you like. However, there might be a high charge on these exits before a minimum period.

Debt funds are liable to be charged two types of taxes depending upon the period of investment-

Short Term Capital Fund Tax- The tax on debt funds held for less than three years is calculated as per the income tax bracket of the investor.

Long Term Capital Fund Tax- Interest earned on investment held for more than three years is charged with a 20% with indexation with 3% cess.

However, there is no TDS on the gains from debt mutual funds. 

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