Debt funds are the funds which invest in fixed income instruments, such as corporate and government bonds, corporate debt securities, and money market instruments and offer capital appreciation. They are also referred to as fixed income funds.
There are around 16 types of debt funds. Within the same type, there are numerous styles of management which could increase of decrease risk.
Usually, debt funds are chosen over fixed deposits, however, some investors tend to take a high risk in their quest to earn more. But financial experts advise that if you want to take risk to make large gains, might as well invest in equity.
Debt fund returns
Most debt funds posted negative returns in recent past. The returns were poor particularly for long and medium-to-long-term funds.
In past three months, long duration and medium-to-long funds gave negative returns. Even the past one month returns for long, medium-to-long and medium duration funds were in negative territory.
At the same time, short and low duration funds in the past three months gave positive returns, albeit muted, of nearly 1 percent. Short duration funds gave 1.03 percent return in past three months and low duration funds gave 0.77 percent. The corresponding figures for one month were 0.40 and 0.26 percent.
Returns posted by debt funds in past three months
| Category | 1-month return (%) | 3-month return (%) |
| Long | -1.22 | -0.17 |
| Medium to long | -0.82 | -0.27 |
| Medium | -0.48 | 0.37 |
| Short | 0.40 | 1.03 |
| Low | 0.26 | 0.77 |
(Source: Value Research)
Analysts believe that debt-oriented schemes are witnessing considerable outflows as investors steer clear of the lower yields. These funds, in fact, have been under intense pressure for quite some time now. This is due to an array of factors which include growing inflation, rise in bond yields, and uncertainty on the rate front.
| Debt mutual funds | 1-year-returns (%) |
| ICICI Prudential Long Term Bond Fund | 2.46 |
| Nippon India Nivesh Lakshya Fund (long term) | 2.58 |
| DSP Bond Fund (medium term) | 4.54 |
| HDFC Medium Term Debt Fund | 6.34 |
| IDFC Bond Fund Medium Term Plan | 4.93 |
| Tata Medium Term Fund | 6.51 |
| Axis Short Term | 5.04 |
| DSP Short-term Fund | 4.37 |
| HDFC Short Term Debt Fund | 5.10 |
(Source: AMFI, direct returns as on March 31)
“Inflation is rising and RBI didn’t raise the key interest rates. This has contributed to increase in debt yields. There is a negative correlation between yields and fund prices. As yields rise, funds decline in value,” says Renu Maheshwari, investment advisor, cofounder, Finscholarz Wealth Managers.
“Because of fall in fund prices, investors can now explore short term funds to invest. Else, they can hold on to long-duration funds for a long time instead of getting carried away with their poor returns in the immediate or short duration,” she adds.