A bond fund is a mutual fund or ETF that primarily invests in fixed-income debt securities — including government bonds (G-Secs, State Development Loans, Treasury Bills), corporate bonds, Non-Convertible Debentures (NCDs), money market instruments, and other debt instruments — with the objective of generating regular income and capital preservation. In India, SEBI categorises debt mutual funds into 16 sub-categories based on the duration and credit quality of the underlying portfolio — ranging from overnight funds (investing in securities maturing in one day) to long-duration funds (investing in bonds with over seven-year maturities) and credit risk funds (investing in lower-rated, higher-yield corporate bonds). Bond fund returns are driven by two factors: coupon income from the underlying bonds and capital gains or losses from changes in market interest rates (when rates fall, bond prices rise, generating capital appreciation). Bond funds are suitable for investors seeking regular income, capital preservation, and portfolio diversification away from equity market volatility. In India, the post-April 2023 taxation changes have made bond funds less tax-efficient compared to fixed deposits for many investors, as indexation benefits were removed for debt fund investors.
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