Debt mutual funds are a great way to earn good returns in your 20’s. In fact, their compounded annual rate of return is higher than equity mutual funds. The foremost reason is that they are less volatile as compared to equity mutual funds.As an investor, you should not be too concerned about the volatility of debt mutual funds as they are performing adequately with low risk taking limits. This can be checked through the fund’s risk parameters and the tenor (debt maturity) of the scheme.However, it is important for you to check on the duration that your debt schemes have taken so that you yourself know how long you will require to repay the principal amount.Short-term debt instruments have a high degree of risk associated with them which may lead to default if there was a deterioration in economic conditions or expectations resulting from external factors like an oil price shock or currency crisis among others. An increase in inflation would also affect consumer confidence which could result in severe fall in demand and consequently reduce competitiveness and raise input prices thereby increasing costs and hurting margins further leading to reduced revenues, increased working capital requirements and hence increased interest burden (higher borrowings) which would lead us into another spiral of increased cost, lower revenues and higher interest burdens etcete