The idea that Debts Fund are risk-free simply because they avoid investing in stocks is untrue. Debt funds are less risky than equity funds, but it doesn't mean they will never cause your money to lose money. As opposed to equity funds, which invest in the stock market, debt funds invest in debt and money market assets, which are subject to many types of risk concerns.
In contrast to the stock market risk that we are all acquainted with, debt funds are vulnerable to interest rate risk, credit risk, and liquidity risk. Although these risk variables are not as obvious as stock market risk on a daily basis, they cannot be fully disregarded.
Interest rate fluctuations that impact the costs of the bonds the Debt Fund has purchased cause interest rate risk to exist. A financial crisis in any of the corporations whose bonds the debt fund has purchased creates credit risk since it makes it very doubtful whether or not the interest and principal on those bonds will be paid. Due to the liquidity risk associated with debt instruments that are not regularly traded, the fund might be obliged to sell these assets in its portfolio at a loss if the situation warrants it. Consequently, investment in debt funds may be somewhat less dangerous than investing in equity funds, albeit it is still not fully risk-free.