Debt Funds can provide benefits for investors if they fit in with their overall investment objectives. To assess whether these funds fit into your investment objectives you need to evaluate them properly. You can evaluate debt funds on the basis of the following parameters:

Portfolio - This gives the list of instruments that the fund has invested in, thus giving an insight into its investment strategy.

Yield to maturity - This is a measure of interest income that can be earned from the portfolio. This should be compared to the current returns of your other safer instruments.

Credit rating - The quality of credit can be seen to understand how vulnerable the fund can be to credit risk. The lower the rating, the more the risk of a default.

Average portfolio maturity - A portfolio of bonds consists of a number of instruments with different maturities. Average maturity is the weighted average of the time left up to maturity. Average maturity gives the indication of the length of time in which the principal amount of the bonds will be repaid.

Duration of portfolio - Can be examined to see the price sensitivity of the portfolio in a changing interest rate scenario. This can give an indication of how volatile the fund can be to interest rate risk.

A fund that has a higher average maturity and duration can be expected to perform well in a scenario where interest rates are falling and vice versa. Bond prices and interest rates are inversely related; the longer the tenure of the bond the more sensitive it is to changes in interest rates.

Taxability of earnings:

Capital gains
a) If the mutual fund units are sold after 3 years from the date of investment, gains are taxed at the rate of 20% after providing the benefit of inflation indexation.
b) If the mutual fund units are sold within 3 years from the date of investment, the entire amount of gain is added to the investors' income and taxed according to the applicable slab rate.
c) No tax is to be paid as long as you continue to hold the units.

Dividends
Dividends are added to the income of the investors and taxed according to their respective tax slabs. Further, if an investor's dividend income exceeds Rs. 5,000 in a financial year, the fund house also deducts a TDS of 10% before distributing the dividend.