Debt funds are often considered low-risk investments, but they are not completely risk-free. Shweta Rajani, Mutual Fund Head, Anand Rathi Wealth, explains that investors need to understand three key risks: interest rate risk, liquidity risk and credit risk. Interest rate changes can impact the value of debt securities, while liquidity risk can arise when lower-credit securities are difficult to sell. Credit risk occurs when an issuer or company defaults on its obligations. However, shorter-duration debt fund categories generally have lower exposure to these risks. Investors should understand the underlying securities, duration and credit quality before choosing a debt fund based on their financial needs and risk tolerance.