In investing, debt means instruments where you lend money to a government, company or bank in return for interest and the promise of repayment. Bonds, debentures, government securities, Treasury bills, commercial paper, fixed deposits and debt mutual funds all belong to this asset class.
Why it matters
Debt tends to be less volatile than equity and can provide predictable income. In a portfolio it often plays the stabiliser — the part that holds steadier when equity markets fall, and the natural home for money needed in the next few years.
How to read it
Three risks shape every debt investment:
- Credit risk — will the borrower pay?
- Interest rate risk — how much will prices move if rates change?
- Liquidity risk — can you sell easily, at a fair price, if you need to?
Short-duration, high-quality debt keeps all three low. Longer duration or lower ratings raise potential yield and risk together.
Common misconceptions
- “Debt funds are like FDs.” A debt fund’s NAV moves with market prices and the credit health of its holdings. Its returns are not fixed in advance.
- “Debt can’t lose money.” Defaults, downgrades and rising rates can all produce losses.
In India: Under current rules, gains on debt mutual fund units bought on or after 1 April 2023 are taxed at your income-tax slab rate, whatever the holding period. Check the latest provisions before investing.
Related terms
Credit risk
The risk that a bond issuer or borrower fails to pay interest or repay principal in full and on time.
Interest rate risk
The risk that a bond’s price falls when market interest rates rise — larger for bonds and debt funds with longer duration.
Duration
The weighted average time, in years, to receive a bond’s cash flows — and a guide to how sensitive its price is to interest rates.
G-Sec
Government Security
A tradeable debt instrument issued by the central or a state government to borrow money, carrying very low credit risk in the domestic market.
Liquid fund
A debt mutual fund that invests in very short-term money-market instruments, often used to park money needed soon.
Equity
Ownership in a company through its shares; equity investors share in the company’s growth and profits, and bear the risk of losses.