Debt Funds

A debt fund is a mutual fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation. Debt funds are also referred to as Income Funds or Bond Funds
Who should invest in Debt Mutual fund:
Debt funds are ideal for investors who want regular income, but are risk-averse. Debt funds are less volatile and, hence, are less risky than equity funds. If you have been saving in traditional fixed income products like Term Deposits, and looking for steady returns with low volatility, debt mutual funds could be a better option, as they help you achieve your financial goals in a more tax efficient manner and therefore earn better returns.
Why Invest in Debt Mutual Fund:
A few major advantages of investing in debt funds are low cost structure, stable returns, high liquidity and reasonably safe. Debt funds also score on post-tax return. Dividends from debt funds are exempt from tax in the hands of investors. The mutual fund, however, has to pay a Dividend Distribution Tax, which is currently 28.325 per cent in case of individuals or Hindu undivided families. While long-term capital gains from debt funds are taxed at 10 per cent without indexation and 20 per cent with indexation, short-term capital gains taxes are levied according to the income-tax bracket one belongs to.
Thus, debt funds can be a good alternative to investors for achieving their financial goals if they do not intend to bear risk involved in equity investments.

There are various types of schemes in the debt fund category, which are classified on the basis of the type of instruments they invest in and the tenure of the instruments in the portfolio, as below:
Liquid & Money Market Funds
Income funds
Short-Term funds
Floating Rate funds (FRF)
Gilt Funds
    Interval Funds
    Multiple Yield Funds
    Dynamic Bond Funds
    Fixed Maturity Plans (FMPs)
    Monthly Income Plans (MIPs)
    Capital Protection Oriented Funds