Mutual Funds (MFs) are classi?ed on the basis of the assets they invest in. Debt Funds invest in Debt instruments like Bonds, Debentures, Money-Market Instruments, Government Securities, etc. They are also called Fixed-Income Funds
There are many kinds of Debt Funds. This depends on the type of Debt instruments they invest in or even the maturity period of the Fixed-income assets. For example, Gilt Funds only invest in Government Securities and Bonds. Meanwhile, some Funds only invest in Debt instruments that mature within a year.
Just like other MFs - you invest in a MF Scheme and buy units. This money is then invested by the Fund Managers across assets that suit the Scheme. When the Debt instruments pay regular coupons or interests, the MF passes it on to you.
Debt Funds have lower risk than Equity Funds. This is because Debt instruments - the underlying assets in Debt MFs - are considered to be low-risk investments. They make regular interest payments and pay back the principal amount after maturity
Debt Funds like Liquid and Ultra Short-Term Funds can act as a good substitute to bank deposits. This is because Liquid Funds have consistently given higher returns than Bank Deposits. At the same time, you can liquidate your savings on a short notice.
Whatever returns you earn from Debt Funds, it is adjusted for in?ation while calculating your Taxes. This is not so for Bank Deposits. This makes Debt Funds more Tax-ef?cient than Bank Deposits. This is especially so for people who fall in the 20-30% Tax bracket.