Stock Market · Mutual funds, deeper

Debt funds

Many retail investors lump all debt funds together as 'safe alternatives to FDs'. The reality is more nuanced. Debt funds carry interest rate risk, credit risk, and post-2023 face full tax burden.

The 16 SEBI debt fund categories

1. Overnight: 1-day maturity, near-zero risk

2. Liquid: 91-day maturity, very low risk

3. Ultra short: 3-6 month maturity

4. Low duration: 6-12 month maturity

5. Money market: up to 1-year debt instruments

6. Short duration: 1-3 year maturity

7. Medium duration: 3-4 year maturity

8. Medium-to-long duration: 4-7 year maturity

9. Long duration: 7+ year maturity

10. Dynamic bond: manager varies duration

11. Corporate bond: 80%+ in AA+ rated corporate bonds

12. Credit risk: 65%+ in AA or below rated bonds

13. Banking & PSU: 80%+ in bank/PSU bonds

14. Gilt: 80%+ in government securities

15. Gilt 10-year constant duration: specifically 10-year G-Secs

16. Floater: 65%+ in floating-rate instruments

The two main risks

1. INTEREST RATE RISK: longer-duration funds fall more when rates rise. A long-duration fund can fall 5-10% in a year if rates spike.

2. CREDIT RISK: corporate bonds can default. Credit risk funds (Franklin Templeton 2020 crisis, IL&FS 2018) have shown the dangers.

> Debt funds aren't 'safe'. They're 'usually safer than equity'. Different debt categories carry very different risks.

Post-2023 taxation

All debt funds (with <35% equity) are now taxed at SLAB RATE regardless of holding period. The old indexation benefit is gone. For high-income investors, this fundamentally changes the math vs FDs and direct G-Secs.

When debt funds still make sense

• Short-term parking (3-12 months): liquid funds beat savings accounts
• Asset allocation (50:50 equity:debt portfolios)
• Lower volatility than equity, even after tax
• Liquidity (no premature withdrawal penalties like FDs)

Picking the right debt fund

• Short-term needs: liquid or ultra short
• 1-3 year horizon: short duration or low duration
• 3+ year horizon: corporate bond or medium duration
• For G-Sec exposure: gilt funds

Takeaway. Debt funds aren't universally "safe". They carry interest rate risk and credit risk. 16 SEBI categories serve different needs. Post-2023, all debt fund gains taxed at slab rate. Match fund category to your time horizon and risk tolerance.