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Debt Funds – What are Debt Funds?

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If you are a cautious investor, you might have had doubts about investing in mutual funds or stock markets. However, you would be delighted to know that you may choose to invest in a certain class of mutual funds without taking on a lot of risks. How? Well, the answer is debt funds. Although you may be familiar with them, it's probable that you still have a persistent concern about how secure these debt mutual funds are in the UAE.

Well, debt funds are certainly more secure than equity funds in the UAE. Even among the numerous debt funds, there are varieties of funds available in the country. These are generally categorised based on their tenure, risk-return ratio, liquidity, and investment instruments. All you need to do is to invest in such funds as per your financial objectives and preferred investment horizon.

Before we understand the major benefits of investing in these funds and the best debt funds that are available in the UAE, let us understand the fundamentals of debt funds.

What are debt funds?

Debt funds are types of mutual funds that primarily invest in fixed income instruments such as corporate bonds and treasury bills. These funds have predetermined interest rates that investors can earn upon maturity of such bonds. This is why they are also referred to as fixed-income securities. Debt funds are usually considered as a low-risk investing alternative because they do not fluctuate much and are not much subject to market volatility. The goal of such funds is generally to build wealth over time as well as provide consistent returns to the investors.

Who should invest in debt funds?

Following type of investors can choose to invest in debt funds in the UAE:

  • If you are looking for a low-risk investment: Debt funds help you to add diversification in your portfolio and therefore must be considered as an investment choice, specifically if you are a long-term investor. Additionally, if you are an investor in the UAE and are looking to invest in less-risky investments, you can consider investing in debt-funds, as they shall be an ideal investment for you.
  • If you are looking for a regular income: Debt-funds also provide you with a stable income opportunity along with stability of returns, flexibility of withdrawals as well as liquidity, so if you are a conservative investor or are seeking regular income, such funds can be a lucrative option for you.
  • If you want to invest in short-term funds: If you have idle funds and are looking for short-term investment opportunities, then debt funds can be the best bet for you. You can either choose to invest in fixed-maturity tenure funds or overnight funds to park your money for a specific period of time.

Advantages of debt funds

Let us now look at some of the reasons for investing in debt funds by considering some of their top advantages as mentioned below:

  • Liquidity: Debt funds, in contrast to conventional funds, do not have a lock-in period and may be redeemed whenever desired, subject to relevant exit loads. Debt funds are regarded as high-liquid instruments since they provide you with easy withdrawal facility at any time during business hours.
  • Tax-efficient: Debt funds may be less tax-intensive than traditional investments. These are generally taxed in the UAE only when they are redeemed. Thus, they provide tax-advantages to the investors.
  • Stabile returns: Debt funds can give an investor's portfolio stability because they are often less volatile than equity funds. These funds can reduce overall risk and diversify an investor's portfolio. They are also thought to be a reliable source of long-term, generally predictable income.

Top debt funds in the UAE

Let us now look at some of the top debt funds in the UAE:

  • SHUAA Financing Opportunities Fund: This fund primarily invests in direct Shariah compliant financing and other debt funds. The main objective of this fund is to generate high income opportunities for its investors while managing to secure their capital.
  • Fidelity Funds - Emerging Market Debt Fund: The fund primarily invests in global developing market debt instruments (both governmental and corporate). Also, as a method of enhancing performance, the manager of the fund retains some freedom to invest in non-index strategies such as local currency and corporate developing market debt. However, sticking to the investing goal is critical for the funds, at the same time, it ensures maximising the investor's wealth in the long-run.
  • Emirates Emerging Market Debt Fund: This fund aspires to generate high income levels while managing excellent capital growth. Since the inception of the fund, it has managed to outperform, with yearly dividend payments of 4-5% and annual gains of 6% to its investors. This fund invests in a range of instruments, including MENA bonds, emerging market corporate debt, global sukuk, and classic money markets.

Global debt funds

Globally, many countries issue debt instruments to help their respective governments cater fiscal or budgetary policies. Such instruments are said to be global debt/bond funds. These funds may be categorised as developed and developing market indices depending on the issuing country of the funds. Now, as a UAE investor, you can choose to invest in these global debt funds, while considering their risks and rewards. However, remember that these instruments are volatile and their risk-return ratio usually varies depending on the political and economic situation of the issuing country. Also, such bonds are rated using globally standardised credit rating analysis, so you must carefully monitor the same before making a viable investment decision.

If you are looking for steady investment opportunities, debt funds ought to make up a significant portion of your asset allocation. But before choosing which fund to invest in, remember that it is crucial to decide which category best matches your investing horizon and risk tolerance. It is always a good idea to keep in mind that the primary goal of debt funds should be to stabilise your portfolio rather than to generate bigger returns.


Q1. Which type of UAE debt funds is best for liquidity?

Ans: Liquid funds and overnight funds are the two most liquid-debt funds in the UAE. With minimal interest or credit risk, these are the most secure investments in the debt category. These have an easy redemption facility and at the same time ensure that you achieve stable returns in the invested period.

Q2. What are the debt funds in the UAE with no credit risk?

Ans: Gilt funds may be your best option if you wish to invest in debt funds with minimal credit risk. These debt funds mostly invest in government securities such as government bonds in the UAE. Thus, they provide security along with lucrative returns on your investment.

Q3. Can debt investments produce losses?

Ans: Generally, debt funds are safe investment instruments but due to changes in interest rates, these funds may yield negative returns. It must be noted that longer-term debt funds are more susceptible to interest rate risk. Therefore, you must carefully analyse the interest rates in UAE and their tendency to fluctuate before investing in these funds.

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