Debt Funds
Fixed-income mutual funds for capital preservation and steady returns - Understanding types and taxation.
What are Debt Funds?
Debt funds allocate capital primarily toward fixed-income securities including corporate bonds, treasury bills, government securities, and money market instruments. They cater to investors prioritizing capital preservation and steady income generation over aggressive growth, making them ideal for conservative portfolios and short-to-medium term goals.
Types of Debt Funds
Liquid Funds
Invest in instruments with maturity up to 91 days. Lowest risk, high liquidity, returns typically 6-7%.
Ultra Short Duration Funds
Macaulay duration of 3-6 months. Slightly higher returns than liquid funds with minimal additional risk.
Short Duration Funds
Macaulay duration of 1-3 years. Balance between safety and returns for medium-term goals.
Corporate Bond Funds
Minimum 80% investment in corporate bonds. Higher yields than government securities with credit risk.
Gilt Funds
Invest only in government securities. Zero credit risk but high interest rate sensitivity.
Taxation of Debt Funds (2026)
Indexation Benefit Removed
- • Short-term gains (≤24 months): Taxed at slab rates
- • Long-term gains (>24 months): Taxed at 12.5% without indexation benefit (from FY 2024-25)
- • TDS applicable on dividend distribution
When to Choose Debt Funds?
- •Emergency corpus parking (Liquid funds)
- •Short-term goals (1-3 years)
- •Portfolio diversification and stability
- •Regular income needs (SWP option)
- •Low-risk alternative to bank FDs