Expense ratio: This is the amount that investors have to pay to the mutual fund company for managing the funds, leading to a reduction in the returns earned.
Variable Income: Dividend payments in case of debt funds may not be fixed, as compared to the fixed interest payment in case of individual debt security.
Variable NAV: The NAV of a debt fund can change with time, and may even reduce, unlike individual debt security in which the total issue price will be returned upon maturity (provided the issuer does not default).
Credit Risk: The fund might invest in securities with a low credit rating, having higher chances of default. This can lead to loss of interest as well as principal.
Interest Rate Risk: It refers to the chance that investment in bonds will suffer due to unexpected changes in the interest rate. An increase in the interest rate leads to falling in bond prices, translating into losses for investors.
Lower Returns: Since debt funds are relatively less risky, returns are also lower as compared to equity funds.