Debt Fund: Online Debt Mutual Fund Investment Plans @0% Commissions
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Debt Mutual Funds let your financial goals find a secure and flexible avenue for growth. These funds offer a prudent way to invest, combining safety and returns. Whether you're looking for wealth accumulation, tax efficiency, or liquidity, Debt Mutual Funds have a solution. Go through this comprehensive guide to learn how Debt Mutual Funds can help you achieve your financial objectives with confidence and ease.

What is Debt Mutual Funds?

Debt funds are investment vehicles that allocate capital to fixed-income securities, including government securities, commercial papers, treasury bills, corporate bonds, and several other money market instruments.

The debt fund invests in assets that have a defined maturity date and an interest rate that the buyer will receive at maturity.

Debt securities are regarded as a low-risk investment option since the returns of a debt fund are not affected by changes in the market.

Types of Debt Mutual Funds

  • Money Market Fund at Kotak: By primarily investing in floating rate securities, money market instruments, and the judicious use of derivatives, the Kotak Money Market Fund seeks to lower the interest rate risk associated with fixed rate assets. The plan is in a unique position to benefit from the yield curve's short end. The Kotak Money Market Fund is a good option for those who want to temporarily store excess money.
  • Kotak Bond Short-Term Fund: This fund is appropriate for investors with a minimum time horizon of six months who may normally prefer to position themselves toward the shorter end of the yield curve.
  • Kotak Savings Fund: This fund's goal is to lower interest rate risk by generating returns through investments in debt and money market instruments. Nevertheless, there is no guarantee or assurance that the fund's investment goal will be met.
  • Kotak Medium-Term Fund: The goal of this fund is to increase capital and produce consistent income by holding a portfolio of money market and medium-term debt instruments. The fund typically has a three-year maturity floor and a seven-year maturity ceiling. The fund, therefore, sits in the middle of the segment between bonds with long and short durations.

Best Performing Debt Mutual Funds

Scheme Name

Expense Ratio

1-Year Return

Kotak Low Duration Fund Direct-Growth



Kotak Gilt Investment and Trust Direct Growth



Kotak Banking & PSU Debt Fund Direct Growth



Kotak Dynamic Bond Fund Direct Growth



All about Debt Mutual Funds

Fixed-income instruments are the primary investment vehicles for debt mutual funds. The advantages of debt funds include predictable returns, a low-cost structure, and relatively high liquidity. When it comes to risk, these are also less volatile than mutual equity funds.

How do Debt Funds work?

Debt mutual fund portfolios are mostly made up of government and corporate bonds, other types of debt securities, and other money market instruments. Periodically, the underlying debt instruments that debt funds invest in also pay interest to them.

Debt funds that receive consistent interest from fixed-income instruments throughout the fund's duration yield returns comparable to those of interest-bearing bank fixed deposits. Every day, this interest money is deposited into a debt fund. The net asset value (NAV) of a debt scheme is also influenced by the interest rates of its underlying assets and by any changes to the holdings' credit rating.

Who Should Invest in Debt Funds?

Investors who have a lesser tolerance for risk are strongly advised to consider debt funds. Debt funds often diversify among a range of securities to maintain stable returns.

  • Investors with a short time horizon (3-12 months): You can invest in liquid funds that yield returns of 7-9% instead of holding your money in a standard savings account.
  • Medium-term investors (3-5 years): A bank fixed deposit is typically the first option that springs to mind if you're looking to invest for three to five years in a low-risk vehicle. Compared to FDs, investing in a dynamic bond fund for a comparable duration typically yields higher returns.

Things to Consider Before Investing

  • Returns: Returns on debt funds are less than those on equity funds. Furthermore, there is no assurance of returns. Interest rate fluctuations have an impact on the NAV of debt funds. The NAV of a debt fund decreases as interest rates rise and vice versa.
  • Expense ratio: When investing in debt funds, this is a crucial consideration. The percentage of the fund's total assets that goes toward fund management fees is known as the cost ratio. A high expense ratio has the potential to reduce your earnings because debt funds do not yield extremely high returns.
  • Consider the risk factors: Risk factors in debt mutual funds are of three types: credit risk, interest rate risk and liquidity risk.


  • Long-term Capital Gains Tax: Capital gains realised beyond the third year of investment are subject to long-term capital gains tax, or LTCG. After three years, a 20% tax on the returns plus indexation benefits would be imposed if you redeem the debt mutual fund units.
  • Short-term Capital Gains Tax: The proceeds from the sale of your debt mutual fund units will be taxed at the appropriate income tax slab rate if you sell them before the three-year mark from the date of acquisition. For example, if you fall under the 10% tax slab, you will have to pay 10% plus 4% in special tax (STCGT).
  • TDS: Debt mutual funds do not qualify for tax deductions at source.

Sources of Returns

  • Debt funds get interest payments from the underlying debt instruments they invest in periodically.
  • Debt funds that collect interest from fixed-income instruments consistently during the duration of the fund generate returns that are similar to bank fixed deposits carrying interest. This interest income is paid into a debt fund each day.
  • A debt scheme's net asset value (NAV) is also affected by changes in the credit rating of the holdings and the interest rates of the underlying assets.

Strategies to Manage Returns

  • Debt funds use changes to the bond portfolios' maturity profile or credit grade to control returns.
  • Higher exposure to long-term debt in a fund can result in significant capital gains during a rate decline and catastrophic losses after an increase in interest rates.

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Frequently Asked Questions

What is a Mutual Fund?

Mutual fund (MF) is a mechanism for pooling money by issuing units to the investors and investing funds in securities in accordance with objectives disclosed in the offer document.

How can I purchase or redeem MF?

Purchase - Login to your Net banking account, select the investment tab and proceed with the purchase option. Select category of scheme eg. Equity or Debt.

For mobile banking investors, you need to login to your mobile banking app, select investment option and then purchase the mutual fund.You can also visit the nearest branch if you need assistance in investing in Mutual funds.


Redeem - Login to your Net banking account, select investment tab, and proceed with the redemption option for the required fund transaction.

For mobile banking investors, you need to login to your mobile banking app, select investment option, then select redemption option.

You can also visit the nearest branch if you need assistance to redeem your funds.

What is a Systematic Investment Plan (SIP)?

An SIP allows an investor to invest regularly. One puts in a small amount every month that is invested in a mutual fund. An SIP allows one to take part in the stock market without trying to second-guess its movements

What is an Investment Horizon?

An Investment Horizon refers to the length of time that an investor is willing to hold the portfolio for. Investment horizon can be classified as following 

  • Short term: These are investments with a short horizon of 3 months to 2 years. You plan to use the money for a particular thing soon, for example, creating a reserve fund for unexpected spending.
  • Medium term: Investment with a medium-term horizon of 2-5 years. You know that you will need the money in a few years. It is also possible to choose products that correspond to this horizon
  • Long term: Investments with longer-term horizons – 5 years or more. On retirement, for children to study and other longer-term goals.  

What is KYC and how to get KYC verified for mutual funds investment?

Know Your Client (KYC) registration is mandatory for all investor as per SEBI guidelines. KYC is being centralized through KYC Registration Agencies (KRAs) registered with SEBI. With this, each investor has to undergo the KYC process only once in the securities market and the details would be shared with other intermediaries by the KRAs.

What is Net Asset Value (NAV)?

NAV is the market value per-unit of all the securities held by the fund. NAV determines performance of a particular scheme of a mutual fund. Mutual funds invest the money collected from investors in securities markets. In simple words, NAV is the market value of the securities held by the scheme. 

Since the market value of securities changes every day, the NAV of a scheme also varies on a day-to-day basis. It is mandatory for mutual funds to disclose the NAV on a regular basis. The NAV per unit is the total market value of securities of a scheme minus any liabilities (or expenses), this is then divided by the total number of units of the scheme on any particular date. 
For example, if the total market value of securities of a mutual fund scheme is  ₹210 lakh and liabilities of ₹10 lakh and the mutual fund has issued 10 lakh units to the investors, then the NAV per unit of the fund is ₹20 (i.e.210 lakh – 10 lakh /10 lakh units). 

What is Growth Option?

If you choose the Growth plan of a mutual fund, the fund will compulsorily reinvest any gains earned in the fund. It does not offer any pay-out. Profits made on the portfolio are necessarily ploughed back into the scheme. These growth plans are continuous compounders of your wealth.

What is dividend payout option?

If you choose the dividend payout plan of a mutual fund, a portion of the return/fund is paid out periodically to the investor. The NAV of a dividend fund faces a drop in value to the extent of dividend paid out.

What is Dividend Reinvestment option?

In a dividend reinvestment plan, the mutual fund buys units to the extent of the dividend declared by the fund at the post-dividend NAV and credits units to the account. This results in an increase in the number of units.

What is Purchase price/ Purchase NAV ?

The purchase price / Purchase NAV is the price at which Investor buys the unit of a scheme. Units are allotted to customer on basis of amount invested divided by NAV as on Investment date.

What is repurchase/ redemption NAV?

Repurchase or redemption NAV is the price at which Investor sells the unit (Minus any load if applicable) Exit load is chargeable as a percentage of NAV if investment is redeemed before the Exit load time

What is a load or no-load fund?

A Load Fund is one that charges a percentage of NAV for entry or exit into the fund. The load structure of a scheme has to be disclosed in its offer documents. In accordance with the SEBI circular no. SEBI/IMD/CIR No.4/168230/09 dated 30 June 2009, there is no entry load for any/all mutual fund schemes. 


Exit load is generally charged if the exit is made before a specified time. For example in most equity funds, the exit load is 1% if the exit is before 1 year. Assuming you bought the fund at a NAV of INR 10, after 6 months the NAV is ₹ 11 and you wish to exit from the fund, you will be charged 1% of 11 = 0.11 and your redemption proceeds would be ₹10.89 (₹11-₹0.11)

Currently, in India, the exit load charged is credited to the scheme. The investors should consider the loads while making investment as these affect their returns. However, the investors should also consider the performance track-record of accomplishment and service standards of the mutual fund which are more important. A no-load fund is one that does not charge for entry or exit load. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.


What are Equity Linked Savings Funds (ELSS)?

These schemes provide tax benefit of up to Rs. 1.5 lakhs under Sec 80C of the Income Tax Act, 1961. They are pure equity funds, however they come with a lock-in period of 3 years. Such funds not only help the investor save tax but also participate in equity markets.

What is expense ratio?

Expense ratio is the cost of running and managing a mutual fund, which is charged to the scheme. Expense ratio represents the annual fund operating expenses of a scheme and other charges, expressed as a percentage of the fund’s average daily net assets. Operating expenses of a scheme are administration, management, advertising related expenses, etc.  

What are the different types of mutual fund schemes?

Schemes according to Maturity Period - A mutual fund scheme can be classified into an open-ended scheme or a close-ended scheme depending on its maturity period. 


What are sector specific funds/schemes?

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents, e.g., Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, Information Technology (IT), Banks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared with diversified funds since they focus on specific sectors. 

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