Key idea
Debt funds are the calmer side of investing, but 'calmer' is not 'risk-free'. Two specific risks are worth understanding.
Debt funds invest in bonds and other fixed-income instruments, aiming for steadier, more predictable returns than equity. They are less volatile, which makes them useful for stability and shorter goals. But they carry their own, quieter risks.
The two risks to know
| Risk | What it means |
|---|---|
| Interest-rate risk | Bond prices fall when interest rates rise |
| Credit risk | A borrower in the fund may default |
Why the category matters
Debt funds come in many types, from very safe liquid and overnight funds to riskier credit-risk funds chasing higher yield. A common mistake is assuming all debt funds are equally safe; a fund reaching for higher returns is usually taking on more credit or interest-rate risk to do it. The name and category tell you which.
Debt funds play defence in a portfolio: stability and income, not high growth. Choose the type to match the job, safer, shorter-duration funds for money you may need sooner. Their taxation (covered later) is now at your slab rate for funds bought after April 2023.
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