Educational guide
Debt Mutual Funds — Categories, Risk & Return Profile
Debt mutual funds are not 'safe' by default — duration risk and credit risk each show up in different categories. Pick the category, not the fund, first.
// three risk dimensions
Duration risk: longer paper → higher rate sensitivity. Credit risk: lower-rated paper → higher yield but default risk. Liquidity risk: smaller AUM or off-the-run paper → wider exit spread.
// picking by horizon
0–3 months: overnight / liquid funds. 3–12 months: ultra short / low duration. 1–3 years: short duration / banking-PSU. 3+ years: corporate bond, gilt or dynamic bond funds.
// tax change in 2023
Debt MFs bought on/after 1-Apr-2023 lose the LTCG benefit — they're now taxed at your slab rate regardless of holding period. This changed the math against direct G-sec investing for high-tax-bracket investors.
// frequently asked questions
Credit-risk and medium-duration funds. Both also carry the highest risk — credit defaults and rate cycles can drag returns close to zero or negative for short periods.