It\u2019s a no-brainer that a debt mutual fund scheme invests in fixed income instruments like Corporate and Government bond, Corporate debt securities and money market instruments etc. A risk-averse investor looking for a regular income should invest in a debt fund. As these funds offer higher liquidity and when the market falls, the NAV of the debt funds does not fall as sharply as that of equity funds. Because of this less volatility, the returns offered are often moderate with debt funds. After the recent SEBI directive, there are 16 categories of debt mutual funds fund houses can offer. Depending on one\u2019s risk profile, financial goals and investment objective, asset allocation in these funds is recommended. ALSO READ: How to factor in returns in a mutual fund investment The way a fund manager of a particular scheme allocates the fund in various avenues determine the fund\u2019s NAV. This composition shall give you an idea about the return, risk and liquidity. The interest rate movements, credit rating and liquidity affect a debt fund\u2019s performance. For example, a rise in the interest rate causes the NAV of the debt fund to fall. The price of a bond moves in an opposite direction as interest rates. And, a decline in bond price leads to a decline in a fund\u2019s NAV. The Macaulay duration of a bond tells about the interest rate sensitivity. It tells how much the price moves if the interest rates move up or down by 1 per cent. With a high modified duration, the impact on the interest rate movement will be high. ALSO READ: This is how NRIs can invest in mutual funds in India The credit rating of a bond indicates its creditworthiness. Mutual funds restrict the bond purchase and issue certain high-quality rating bonds, which are specified in their prospectuses. Ratings of a bond range from AAA or Aaa (extremely unlikely to default) to D (currently in default). Bonds rated BBB or below by S&P or Baa or below by Moody's are not considered to be of investment grade Before investing in a debt mutual fund, evaluate the percentage allocation in corporate debt. Less liquidity of corporate bonds makes its a bad idea if you wish to invest for a short-term period. The redemption pressure on the fund will cause the securities to be sold at a discount consequently, lowering the NAV. ALSO READ: This is how you can become wealthy Moreover, the maturity period of a fund directly impacts the return of the fund. A fund has a lower volatility and returns if the maturity period is low. A fund with a long maturity period is more volatile but the returns are likely to be better. Your debt fund invests in a number of instruments with varying maturity. The average maturity of a bond tells about the bond volatility. A debt fund with an average maturity of 4 years is more volatile in the short term than a fund with an average maturity of 6 months. It is because of the fact that the longer average maturity is associated with, the higher returns over a long term. Investing in debt funds becomes more essential when you are near your investing goal. The objective shifts more garnering better returns to securing the earning. In order to hedge the risk, start shifting from equity to debt to secure your gains. ALSO READ: 6 steps of financial planning for new salary earners A similar principle should be deployed as you near the golden handshake. Shift from equity to debt by at least 20 per cent when you are just 10 years away from retirement. The priority should be safeguarding the earned wealth. Picking the right debt mutual fund is not as tricky as it may sound. With an abundance of the schemes available before the investors and the plethora of related information, planning and picking the right debt mutual fund is nowhere near to climbing a mountain.