Debt Mutual funds are those kinds of funds that earn you a steady rate of return. And also, reduces the risk as the rate of return is very less likely to fluctuate. Example: Government Bonds, Corporate Bonds, Treasury Bills etc. But, people being unaware still think that Banks, FD’s are better options for saving due to no risk involves. Whereas Debt funds provide a similar rate of return which has a possibility to go up as well, unlike bank fixed deposits. People are still unaware that debt funds have minimal risk involved but are capable of earning a higher rate of interest.

Debt Mutual Fund Schemes Can Serve As An Alternative To Bank Deposits. However, There Investors Need To Be Aware Of Following Difference:

Point of Difference Debt Mutual Funds Bank Fixed deposits
Rate of Return Not Fixed but there is a possibility it might yield higher return then Bank deposits Fixed
Returns on investment at maturity Not Fixed Fixed
Tax Benefit Debt funds enjoy more tax rebate as an investment. Example: Funds invested for more than 3 years is treated as long-term capital gains and is liable for indexation Taxable as per your income slab
TDS (Tax Deducted at Source) Not applicable Applicable
Options More options are available as compared to Bank Fixed deposits Less options are available as compared to Debt funds


Advantages of Debt mutual funds Fixed Deposits is as follows:
  • Liquidity
The best thing about Debt Mutual Funds is that the amount can be withdrawn anytime with very less or no exit load. The redemption process is well stabilised and the amount hits the bank account within 1 working day and now-a-days some companies also provide ATM card by which withdrawal can be done anytime even in off market
  • Tax efficiency
Tax is not at all deducted at source. Also if money is invested for more than 3 years then it is treated as Long-term capital gain and taxable that too after considering indexation
  • Returns
The pre-tax rate of return on debt funds is also higher by at least 0.5-1.0% as compared to fixed deposits. Whereas an average short-term debt fund has yields 9.5% returns, and many long-term bond funds have risen by more than 11.0% during the same period. Debt funds are considered better than other fixed income products available on market:
  • National Savings Certificates (NSCs)
  • Public Provident Fund (PPF)
  • Unit Linked Insurance Plans (ULIPs)
  • Endowment Policies


Are you already convinced that you should invest in debt mutual funds? Wait, there is some more information you need to decide whether these are right for you:
  • Risk-averse investors
Debt funds are most suitable for people who are not willing to take high risk and want to earn a stable rate of return. Generally, people in retirement age or close to retirement age, people having the responsibility of dependents should go for debt funds.
  • Financial goals with short durations
People willing to invest for less than 3 years should invest in Debt funds. Also, these funds can be used for short period as less as 15 days or a weekend also which gives you better return than saving bank account (without any penalty)
  • Financial goals of long duration
Medium-term investors & Long-term investors, who are investing in high critical goals such as retirement; child education should also invest some part in debt funds.It gives you high yield than any fixed saving instrument.


Gilt Funds
  • These funds invest in government securities having different maturities ranging from 15 to 30 years
  • Rate of return of these funds is sensitive to “Interest Rates”
  • Net Asset value of gilt funds is volatile
  • Capital appreciation is prime objective of Gilt funds
  • Investor willing to take high or moderate risk should invest in Gilt Funds
Income Funds
  • Such funds invest in fixed income securities having different maturities like debentures, bonds, government securities.
  • Example Investment can be made for 2-3 years in Corporate Non-Convertible Debentures whereas investment can be made for 20 years in government bonds.
  • Income bonds help to earn good rate of return because the investment strategy comprises of both holding until maturity and taking duration calls
  • Average maturity period is of 7-20 years. Therefore, these kinds of funds are quite sensitive to interest rate movements
Short Term Debt Funds
  • These funds invest in bonds having short maturity (ranging from 2-3 years) like in Commercial Papers (CP), Certificate of Deposits (CD) and short maturity bonds
  • These funds are dynamic in nature where fund manager invest in different maturities of bond so that it can balance out the interest rate volatility.
Liquid Funds
  • Also known as money market mutual funds and also invest in money market commercial papers , treasury bills, term deposits and certificate of deposits
  • Maturity of these securities is less than or equal to 91 days
  • Rate of return is high as compared to savings bank
  • Tax is not deducted at source for these funds
  • No exit load
  • Money can be withdrawn within 24 hours on business days
  • Liquid funds are suitable to earn better interest rate on cash lying idle in their savings bank account
Fixed Maturity Plans
  • Also known as FMP’s are close-ended schemes
  • Investment in these funds can only be done during the offer period
  • Maturity of the scheme is fixed such as 90, 180 and 370 days etc
  • They invest in fixed income securities in which maturity I in matching with the tenure of scheme
  • The investment in these bonds are held till maturity thus rate of return is also quite stable
  • Best suited for people not willing to take risks and want to earn stable return and at the same time who are looking for tax benefit for investment of more than 3 years
  • Rate of return is better that bank fixed deposits
  • Maintaining the liquidity by buying / selling the units that are listed on stock exchange
Capital Protection Fund
  • These funds come with guarantee of your capital
  • These are also close-ended schemes having lock-in of 3-5 year
  • Here, fund manager invests up to 20% in equity and rest is invested in government securities fund and corporate funds
  • Returns are relatively higher than FD