How-to debt fund fund selection

How to select a debt mutual fund

From WebNotes, a public knowledge base. Last updated 19 May 2026. Reading time ~4 min.

Key facts

Sub-categories	16 per SEBI categorisation (liquid to long duration to credit risk)
Risk dimensions	Credit risk + interest rate risk + liquidity risk
Tax	Slab rate (Section 50AA, post April 2023)
Yield range	3-9% YTM depending on category

Procedure

Define horizon and use case<1 year: Overnight / Liquid. 1-3 year: UST / Money Market / Short Duration. 3-5 year: Corporate Bond / Banking & PSU. 5+ year: Medium-Long Duration (caution due to interest rate risk).
Filter by credit profileConservative: AAA+ only. Moderate: AA+ and above. Aggressive (credit risk fund): AA and below. Most retail debt money should be AAA.
Examine modified durationDuration measures sensitivity to interest rate changes. Higher duration = higher interest rate risk. Match duration to horizon.
Compare YTM (Yield to Maturity)Gross YTM is the portfolio’s expected return at current rates. Net of expense = approximate net yield.
Expense ratioLiquid: <0.25%. UST / Short Duration: <0.40%. Corporate Bond / Banking PSU: <0.50%. Long Duration: <0.70%.
AUM and liquidityAUM Rs 1,000+ crore typical. Larger AUM provides more liquidity headroom.
Credit event historyCheck 2018 IL&FS, 2019 DHFL, 2020 Franklin episodes. Funds that escaped without write-downs demonstrated credit discipline.
Commit and stagger entryLump sum: stagger via STP over 4-8 weeks. SIP: monthly.

Debt fund selection is multi-dimensional: credit + duration + expense + liquidity. Post April 2023 (Section 50AA), all gains are slab-rate-taxed; planning shifts to yield-after-expense and tax-deferral via growth option.

Conflict-of-interest disclosure. This guide is published by webnotes.in for informational purposes. WebNotes has no commercial relationship with any AMC or platform. No affiliate commission is earned.

Market-risk disclaimer. Mutual fund investments are subject to market risks. Past performance is not indicative of future returns. Debt funds can lose value during credit events or interest rate spikes.

Step-by-step procedure

See the procedure infobox above for the eight steps.

Sub-category to horizon mapping

Horizon	Sub-category
<1 month	Overnight
1-3 month	Liquid
3-12 month	Ultra Short Duration / Money Market
1-3 year	Short Duration / Low Duration
3-5 year	Corporate Bond / Banking & PSU
5-7 year	Medium Duration / Medium-Long Duration
7+ year	Long Duration / Gilt (interest rate risk substantial)

External references

References

SEBI (Mutual Funds) Regulations, 1996.
SEBI Categorisation Circular, October 2017.
Income Tax Act, 1961, Section 50AA.
Finance Act, 2023.
AMFI Best Practice Guidelines.

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Last reviewed: 19 May 2026
Conflicts of interest: WebNotes is independent. No relationship with any broker, registrar or bank named in this article.