Bond/Debt Mutual Fund: An Overview

Bond/Debt mutual funds are funds that invest in instruments such as Treasury bill & Treasury bond (issued by Government), Certificate of Deposit (issued by Banks), and Commercial Paper & Bonds (issued by corporate).

Categories of Debt Mutual fund

Category	Suitable for
Liquid fund Money Market funds Ultra Short term fund	Invest primarily in short term securities like certificate of deposit, Commercial paper, Treasury bill. Weighted average maturity of the fund would be less than 1 year. Often used as alternative to a savings bank account and can be used to park one’s surplus cash.
Short term Fund Medium term fund	Invest primarily in corporate bonds with tenor (maturity) of 1-5 years. Often used to generate return better than an comparable Bank FD and suitable for investors with investment Horizon of 1-5 year period
Long term Fund Income fund	Invest primarily in corporate bonds with tenor (maturity) greater than 5 years. Often used to generate return better than an comparable Bank FD and suitable for investors with longer investment horizon
Gilt funds	Invest primarily in Government securities; Gilt funds can be again classified as short term gilt fund (tenor less than 5 Years) and long term gilt fund (tenor greater than 5 year). Gilt fund have minimal credit risk but would be exposed to interest risk

Bank FD vs Bond/Debt Mutual Fund

Particulars	Bank Fixed Deposit	Bond/Debt Mutual Fund
Return	Fixed	Variable
Potential Return (>1 Year)	7-8%	9-10%
Maturity Period	Fixed period	·         Open ended schemes allows to redeem anytime ·         Closed ended schemes have fixed maturity
Pre closure	Pre closure penalty of 0.5-2%	·         Exit load might be applicable if exited within 1 year and can range from 0.5-1% for Medium/long term bonds. ·         No load when held for more than 1 year for medium/long term bonds ·         No load on liquid/ultra  short term bonds regardless of holding period
Partial withdrawal	Not allowed	allowed
Taxable	Yes	Yes
Taxable Impact	High	Low
Tax efficiency	Low	High

Conclusion: Bond/Debt Mutual Fund provides better return than equivalent bank FD with marginally higher risk; Bond/Debt Mutual fund provides lot of flexibility when it comes to liquidity and more tax efficient compared to a bank FD. So would advise to seriously consider Debt Mutual fund as an alternative to Bank FD.

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