How to create a debt fund investment strategy?


Investors generally look for ways to maximise their returns while minimising their risk exposure. This becomes a challenge, especially when the stock market is volatile and traditional investments do not seem to suffice. In such a scenario, debt fund investments can be a promising option for stable returns without exposure to excessive risk.

Debt funds are mutual fund schemes that invest in fixed-income securities such as treasury bills, corporate bonds, government securities, and money market instruments. These funds can add stability and bring regular income to your portfolio, provided you develop an effective strategy based on your financial goals, risk preferences, and market conditions. Here’s how to do it.

Evaluate different types of debt funds

Different types of debt funds are available, including liquid funds, low-duration funds, money market funds, short-duration funds, corporate bond funds, gilt funds, credit risk funds, and dynamic bond funds. Each type has different risk and returns potential levels, so choose one that fits your risk profile, investment goals, and current financial situation better.

For instance, liquid mutual funds are a less risky option since they invest in short-term government securities and treasury bills with maturities of up to 91 days. Conversely, credit risk funds are a bit aggressive since they focus on generating high returns by investing in low-rated corporate debt funds.

Establish your own criteria

Set a goal for yourself before investing to ensure that your investments are aligned with your goals. For example, if your goal is capital preservation, look for low-risk options such as government bonds or treasury bills; if your goal is more returns, corporate bonds may work for you.

Additionally, consider how much liquidity you need from your investments; some funds, like overnight and liquid funds, offer instant access facility, while some may have certain restrictions on withdrawals or redemptions.

Diversify your portfolio

Try to diversify within the debt fund asset class by investing in different categories such as long-term andshort-term debt funds, corporate bonds, government securities, etc., as well as different maturity dates so that you can balance risks and maximise returns.

It is equally important to invest in different asset classes, such as equities, to balance risks while still having the potential for significant capital appreciation over time.

Take a three-bucket approach (cash bucket, core bucket, and alpha bucket)

Cash Bucket – Consists of highly liquid investments with low volatility, such as overnight funds or liquid funds that provide instant liquidity with little or no risk. A good rule of thumb is to invest an amount that can cover three to six months of expenses in case of any unexpected costs or emergencies

Core Bucket– Comprises investments that are relatively safe with moderate returns. This may include corporate bond funds and short-term, medium-term, and low-duration funds. The idea here is to ensure steady income while still achieving higher returns than those provided by the cash bucket instruments.

Alpha Bucket – Consists of investments with relatively high volatility but also high potential for returns. This could include dynamic bond funds, debt-oriented hybrid funds, or credit risk funds.

While these investments have proven themselves capable of providing attractive returns over time, they also carry significant risks. Thus, they should only form part of your mutual fund portfolio if you can handle more risk in exchange for potentially greater rewards.


Creating a well-structured debt fund investment strategy is critical to achieving your financial goals. Thus, take time to research different debt funds products, compare fees and terms and conditions, analyse historical performance data and returns, and consider ratings from independent rating agencies. Moreover, consult an experienced financial advisor who can offer sound advice keeping your specific financial goals in perspective.

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