Definition of Debt Fund
A debt fund is a mutual fund that invests primarily in fixed-income securities such as government securities (G-Secs), treasury bills, corporate bonds, debentures, and money market instruments. These are generally lower-risk than equity funds and aim to provide stable, predictable returns.
Debt funds are categorized by the duration and credit quality of their investments: liquid funds (up to 91 days), overnight funds, ultra short-duration, short-duration, corporate bond funds, gilt funds (government securities), and dynamic bond funds. The risk-return profile varies across categories.
Tax treatment (post-Budget 2023): All debt fund gains are now taxed at the investor's applicable income tax slab rate, regardless of holding period (the earlier LTCG with indexation benefit has been removed). This makes traditional fixed deposits a viable alternative to debt funds for many investors now. However, debt funds still offer liquidity, professional management, and diversification benefits over individual FDs.