How a debt fund earns
The fund earns the interest on the bonds it holds. Its NAV also moves when bond prices change. Bond prices fall when interest rates rise and rise when rates fall, so a debt fund can lose value in the short term even though it earns interest every day.
Types by duration (SEBI categories)
| Category | What it holds |
|---|---|
| Overnight | One-day instruments |
| Liquid | Instruments up to 91 days |
| Money market | Instruments up to one year |
| Short duration | Duration 1 to 3 years |
| Corporate bond | At least 80% in high-rated corporate bonds |
| Gilt | At least 80% in government securities |
| Credit risk | At least 65% in lower-rated papers; higher risk |
| Banking & PSU | At least 80% in banks, PSUs and public financial institutions |
| Dynamic bond | Manager shifts duration as rates change |
A new category in 2026 is sectoral debt, which concentrates in a single specified sector.
The three risks
- Interest-rate risk: longer-duration funds fall more when rates rise.
- Credit risk: the issuer may delay or fail to pay. The 2020 wind-up of six debt schemes by Franklin Templeton India is the best-known example.
- Liquidity risk: in stress, bonds can be hard to sell at fair prices.
SEBI's Potential Risk Class matrix tells you where a scheme sits on interest-rate and credit risk. See riskometer.
Debt fund vs fixed deposit
| Debt fund | Bank FD | |
|---|---|---|
| Return | Not guaranteed; NAV moves | Fixed at booking |
| Capital | Can fall in the short term | Stable (within DICGC cover limits) |
| Liquidity | Redeem any business day (some exit loads) | Premature withdrawal rules apply |
| Tax | Slab rate on gains for most debt funds | Interest taxed at slab rate each year |
How debt funds are taxed
For debt funds bought on or after 1 April 2023, gains are taxed at your income-tax slab rate whatever the holding period, with no indexation benefit. From the assessment year 2026-27 the law defines a "specified mutual fund" as one that invests more than 65% in debt and money-market instruments (or in units of such funds). Check the exact treatment for your fund; see capital gains on mutual funds.
Who uses them
Debt funds suit goals within a few years, an emergency-fund top-up in liquid or money-market schemes, and the stable part of a portfolio. Match the fund's duration to the time you have: money needed in six months belongs in liquid or money-market funds, not a long-duration fund.
Debt-oriented schemes held ₹19.33 lakh crore at the end of August 2026 per AMFI.
Questions people ask
What is a debt fund?
A mutual fund that invests in bonds and similar instruments.
Are debt funds safe?
They are generally steadier than equity but not risk-free; they can lose value from rate moves or credit events.
Is a debt fund better than an FD?
Different. An FD guarantees a rate; a debt fund may earn more or less and has no guarantee.
How are debt funds taxed?
At slab rate on gains for most debt funds bought after 1 April 2023.
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Related terms
How we can help
Sources
- SEBI circular dated 26 February 2026
- Finance Act 2024 amendment to section 50AA (specified mutual fund, applicable from AY 2026-27)
- AMFI Monthly Note, August 2026
- SEBI circular on Potential Risk Class matrix.
Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. This page is general education, not personal advice. Back to the full glossary