This document provides an overview of debt mutual funds. It defines debt mutual funds as funds that invest in debt instruments issued by governments, banks, and corporations to generate regular income for investors. It describes the different types of debt mutual funds such as gilt funds, income funds, and short-term plans. It also outlines the risks associated with debt mutual funds, namely credit risk and interest rate risk, and compares the tax treatment and returns of debt mutual funds versus fixed deposits.

1. Debt Mutual Fund
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2. Agenda
• What is debt mutual fund?
• Type of debt mutual fund
• Risk
• Comparison with FD

3. What is Debt Mutual Fund
 The objective of debt funds is to invest in debt papers. Government Securities, private companies,
banks and financial institutions are some of the major issuers of debt papers. By investing in debt
instruments, these funds ensure low risk and provide stable income to the investors
 The debt mutual fund is primarily focused on getting a regular return. The investments of the
fund are in deposits/bonds with different maturing tenures and different interest rates. The
current income from these funds will be in the range of 7 to 10 per cent.
 Debt Mutual fund offers capital appreciation. This is a major advantage that Investor gets from
investing in mutual funds rather than directly in a bank deposit. As debt instruments are tradable
in markets. Falling interest rate scenario offers higher yield on bond investment. Debt mutual
fund get higher yield when the interest rate comes down.

4. Type of Debt Mutual Funds
 Gilt Funds: Invest their corpus in securities issued by Government, popularly known as
Government of India debt papers. These Funds carry zero Default risk but are associated with
Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
 Income Funds: Invest a major portion into various debt instruments such as bonds, corporate
debentures and Government securities.
 MIPs: Invests maximum of their total corpus in debt instruments while they take minimum
exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly
high on the risk-return matrix when compared with other debt schemes.

5. Type of debt mutual funds
 Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds
primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers
(CPs). Some portion of the corpus is also invested in corporate debentures.
 Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and
preservation of capital. These schemes invest in short-term instruments like Treasury Bills,
inter-bank call money market, CPs and CDs. These funds are meant for short-term cash
management of corporate houses and are meant for an investment horizon of 1day to 3 months.
These schemes rank low on risk-return matrix and are considered to be the safest amongst all
categories of mutual funds.
 Source – Mutualfundindia

6. Risk Associated with Debt Mutual
fund
Every debt fund is exposed to two risks –
• Credit default risk
• Interest rate risk
 Credit risk: This is also known as the default risk and arises from the possibility that the issuer
of the debt instrument may be unable to pay periodic interest or repay principal on maturity.
 The creditworthiness of the issuer is assessed through the ratings assigned by credit rating
agencies. Credit default risk can be easily gauged from a debt fund's portfolio by looking at the
credit rating of the instruments invested in.
 Liquid funds and liquid plus funds are the right choices for investors who look at debt funds for
risk-free fixed income. These schemes are considered very safe thanks to their short tenures of
investments, ranging from 15 days to six months.

7. Risk Associated with Debt Mutual
fund
 Interest Rate Risk: The price of debt securities, especially bonds, is extremely sensitive to the
movement in interest rates. The price of a bond falls as the interest rate rises, and vice versa.
Therefore, the value of bond investments is adversely affected during a period of rising interest
rates. And give good capital appreciation in falling interest rate scenario
 A drop in interest rates raises the yield of debt investments of these funds and vice-versa. In a
rising interest rate scenario, the net asset values (NAVs) of medium-term and long term funds are
affected adversely. But that does not necessarily mean there is no case for investing in them,
particularly if your intention is to park a part of your investible surplus in them for three to five
years or more.

8. Comparison with FD
Particulars Bank FD Debt Mutual Fund
Investment Amount (Rs.) 1,000,000 1,000,000
Assumed Net Yield to investor (p.a) 8.50% 8.50%
Tenor (Months) 12 12
Amount at Maturity (Rs.) 1,085,000 1,085,000
Interest 85,000 -
Capital Gain if Any - 85,000
Indexed Cost of Acquisition N.A. 1,070,000
Indexed Gain/ (Loss) N.A. 15,000
Tax Rate @ 30.90% 20.60%
Tax on Interest on FD/ Capital Gain on MF 26,265 0
Capital Gain tax 0 3,090
Post Tax Income 58,735 81,910
Post Tax Returns 5.87% 8.19%
Tax treatment
Debt mutual funds are taxed like debt instruments
The short term capital gains are taxed as per the tax slab and the long term capital gains tax is
10%without indexation & 20% with Indexation. The tenure for long term capital gains is an
investment period of over 1 year (365 days).
Link for CII data - http://www.caalley.com/ca/cii.html

9. Disclaimer
The analysis is based on the information provided by the clients. Right Horizons has used information that is
publicly available and developed in-house; and gathered from sources believed to be reliable. Right Horizons
does not warrant accuracy and/or completeness of the same. Please note that persons subscribing or
planning to subscribe the recommended products should do so after verifying the terms of the products.
Financial products and instruments are subject to market risks and yields could fluctuate depending on
various factors affecting capital / debt markets. Please note that the past performance may or may or may
not be sustained in future. Insurance is the subject matter of the solicitation for the Insurance Plans
suggested. Right Horizons shall not be responsible for any loss or damage of any nature, including and not
limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss or profit in any way
arising out of the report and its recommendation. The recipient alone shall be fully responsible and liable for
any decision taken on the basis of this report. This report is based on the proprietary financial modeling of
Right Horizons. No part of this report may be duplicated in any form and/or redistributed without the prior
written permission of the CEO of Right Horizons.

10. Thank You
Presented by:
Right Horizons FS Pvt. Ltd.