Best Debt Funds

  • Rudri Rawell
  • Jun 03 2021
  • 19 minutes
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Mutual funds are fast becoming one of the most preferred investment options for new and also seasoned investors. Investors look for diversification and the regular returns from mutual funds. One of the preferred mutual fund types is debt mutual funds. These primarily invest in fixed-income securities such as bonds, treasury bills, Government Securities, money market instruments, etc. 

Debt funds can further be categorised depending upon factors like investment horizon, instruments selected maturity, etc. Here, we will explore the different debt mutual fund options available for investment in India.

What are Debt Mutual Funds?

Debt mutual funds mainly aim to provide regular interest income combined with capital appreciation to investors. These funds invest in fixed-income securities and are preferred by investors who wish to stay away from volatile equity markets. Investors can expect fixed coupon payment from debt mutual fund investment. These returns can be calculated in advance using the coupon rate and tenure. Thus, the fund manager and investors can have a fair idea of the expected returns from debt mutual fund investment.

How do Debt Mutual Funds Work?

Debt Mutual Funds are professionally managed by fund managers who invest in fixed income securities as per the investment objective of the fund. The fund managers select investment instruments according to their credit ratings and as per the nature of the fund. The credit rating of an instrument helps to gauge whether the firm can meet the interest obligations.

Most fund managers normally invest in instruments that have high credit quality. A higher credit rating indicates that the issuer will be able to disburse timely interest payments and also pay back the principal amount at the time of maturity. Through investments in high credit quality instruments, debt mutual funds aim to secure the principal investment made by investors.

The fund manager also considers the maturity period of instruments in each portfolio against the interest rate outlook of the economy. If the interest rates are expected to fall, the fund manager focuses on investment in long-term securities. On the other hand, if the interest rates are about to rise, investments are targeted towards short-term securities.

Different types of Debt Funds

Overnight Funds

Overnight funds invest in securities that have one-day maturity. These funds are not impacted by interest fluctuations because of the short duration and are therefore preferred by investors. Here is a list of top recommended overnight funds and key statistics for investor reference:

  1. HDFC Overnight Fund
    This is an open ended debt scheme that primarily invests in overnight securities. The scheme aims to generate returns through investment in debt and money market instruments that have overnight maturity.
Inception Date February 6, 2002
Benchmark Name CRISIL Overnight Index
Fund Manager Mr. Anil Bamboli, Mr. Sankalp Baid
Expense Ratio 0.10%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
3.02% 3.92% 4.71% 5.24% 6.27%
  1. SBI Overnight Fund
    The fund aims to provide the investors an opportunity to invest in overnight securities that have a maturity of 1 business day. It mainly invests in overnight securities with the objective to generate returns that correspond with the overnight rates prevailing in the money markets.
Inception Date October 1, 2002
Benchmark Name CRISIL Overnight Index
Fund Manager Mr. R. Arun
Expense Ratio 0.10%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
3.04% 3.94% 4.73% 5.28% 6.58%
  1. ICICI Prudential Overnight Fund
    The scheme aims to provide reasonable returns combined with low risk and high liquidity. It primarily invests in overnight securities that have a maturity of 1 business day. 
Inception Date November 11, 2018
Benchmark Name CRISIL Overnight Index
Fund Manager Rahul Goswami, Rohan Maru, Nikhil Kabra
Expense Ratio 0.10%

Historical Returns of the Fund (annualised)

1-Year 2-Year Since Inception
3.04% 3.94% 4.42%

Liquid Funds

Liquid mutual funds allocate money to short-term money market securities that have maturities of less than 91 days. Investors who wish to invest for a short period with limited risk can invest in liquid funds. These typically offer higher returns as compared to regular bank deposits. Here is a list of top recommended liquid funds and key statistics for investor reference:

  1. ICICI Prudential Liquid Fund
    This open-ended scheme mainly invests in money market and debt instruments with a maturity of maximum 91 days. It has a moderate risk and high liquidity profile. 
Inception Date November 17, 2005
Benchmark Name Crisil Liquid Fund Index TRI
Fund Manager Rahul Goswami, Rohan Maru, Priyanka Khandelwal
Expense Ratio 0.20%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
3.46% 4.75% 5.67% 6.20% 7.28%
  1. Aditya Birla Sun Life Liquid Fund
    This is an open-ended liquid scheme that aims to provide reasonable returns combined with high safety and liquidity via investments in high quality debt and money market instruments.
Inception Date June 17, 1997
Benchmark Name CRISIL Liquid TRI
Fund Manager Mr. Kaustubh Gupta,Ms. Sunaina da Cunha
Expense Ratio 0.21%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
3.49% 4.80% 5.73% 6.25% 7.34%
  1. HDFC Liquid Fund
    This is an open ended liquid scheme that invests in debt and money market instruments with residual maturity of maximum 91 days. It aims to generate income through a portfolio of fixed income instruments that offer low risk and reasonable returns.
Inception Date October 17, 2000
Benchmark Name CRISIL Liquid TRI
Fund Manager Mr. Anupam JoshiMr. Sankalp Baid
Expense Ratio 0.20%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
3.30% 4.62% 5.57% 6.10% 7.22%

Ultra Short-Duration Funds

These debt funds allocate money in debt and money market instruments that have maturities between 3 to 6 months. Most ultra short-duration funds can offer better returns than bank fixed deposits. These also have relatively lower interest rate risk. Here is a list of top recommended ultra short-duration funds and key statistics for investor reference:

  1. HDFC Ultra S/T Fund
    The scheme aims to generate income through investment in debt securities and money market instruments. It may be best suitable for investors looking to earn regular income with high liquidity. 
Inception Date September 25, 2018
Benchmark Name Nifty 50
Fund Manager Anil Bamboli
Expense Ratio 0.24%

Historical Returns of the Fund (annualised)

1-Year 2-Year Since Inception
5.58% 6.58% 7.17%
  1. ICICI Prudential Ultra Short Term Fund
    The scheme aims to generate returns through investments in debt and money market instruments. It is ideal for investors who want to park their funds for a short duration and earn regular income or maintain high liquidity.
Inception Date May 03, 2011
Benchmark Name Nifty Ultra Short Duration Debt Index TRI
Fund Manager Manish Banthia, Ritesh Lunawat
Expense Ratio 0.39%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
6.73% 7.35% 7.75% 8.17% 8.77%
  1. IDFC Ultra Short Term Fund
    The scheme aims to provide investment opportunities for short term savings by adopting a low risk strategy for stable returns. Its portfolio mainly comprises debt and money market securities that have short maturities. This fund type is ideal for those looking to generate regular income and maintain high liquidity.
Inception Date July 18, 2018
Benchmark Name NIFTY Ultra Short Duration Debt Index
Fund Manager Harshal Joshi
Expense Ratio 0.26%

Historical Returns of the Fund (annualised)

1-Year 2-Year Since Inception
4.45% 6.05% 6.74%

Low Duration Funds

Low-duration funds invest in short-term debt securities while ensuring that the duration of the fund portfolio remains between 6 to 12 months. These funds invest in assets of longer maturity and lower credit quality as compared to overnight or liquid funds. Here is a list of top recommended low duration funds and key statistics for investor reference:

  1. Axis Treasury Advantage
    This scheme primarily invests in a mix of money market and short term debt instruments such that the portfolio has a marginally higher maturity when compared to a liquid fund. It strives to maintain a reasonable balance between safety and liquidity. 
Inception Date October 09, 2009
Benchmark Name NIFTY Low Duration Debt IndexNIFTY 1 Year T-Bill Index
Fund Manager Devang Shah
Expense Ratio 0.29%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
6.48% 7.48% 7.84% 7.71% 8.34%
  1. SBI Magnum Low Duration Fund
    The investment strategy of this scheme is to invest its corpus in a range of debt and money market securities. It aims to provide attractive risk-adjusted returns to investors while managing the credit risk and interest rate risk.
Inception Date July 27, 2007
Benchmark Name Nifty Low duration Debt Index
Fund Manager Mr. Rajeev Radhakrishnan
Expense Ratio 0.40%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
5.76% 7.14% 7.47% 7.35% 8.01%
  1. IDFC Low Duration Fund
    The scheme offers an investment avenue for investors looking to park short term savings while generating returns in line with a low-risk strategy. The portfolio is primarily invested in debt and money market securities that have maturities ranging from 6-12 months.
Inception Date January 01, 2013
Benchmark Name NIFTY Low Duration Debt Total Return Index
Fund Manager Anurag Mittal
Expense Ratio 0.30%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
5.78% 7.01% 7.40% 7.44% 8.19%

Corporate Bond Fund

These are funds that invest a minimum of 80% pool in highest-rated corporate bonds. These offer better chances of earning higher returns as compared to short-term debt funds. However, investors must look out for the credit risk associated with downgraded ratings of corporate bonds, if any. Here is a list of top recommended corporate bond funds and key statistics for investor reference:

  1. ICICI Prudential Corporate Bond Fund
    The scheme aims to generate income through investments in corporate bonds that are rated AA+ and above. It seeks to maintain an optimum balance of risk, returns and liquidity. It is best suited for investors looking to park short term savings and generate regular income. 
Inception Date January 02, 2013
Benchmark Name CRISIL AAA Short-Term Bond Index
Fund Manager Chandni GuptaRahul Goswami Anuj Tagra.
Expense Ratio 0.28%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
8.60% 9.49% 9.05% 8.43% 8.91%
  1. HDFC Corporate Bond Fund
    The open-ended scheme aims to generate income and capital appreciation through investments in AA+ and above-rated corporate bonds. It is rated as moderate risk. 
Inception Date June 29, 2010
Benchmark Name NIFTY Corporate Bond Total Return Index
Fund Manager Anupam Joshi
Expense Ratio 0.30%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
8.84% 10.05% 9.52% 8.74% 8.92%
  1. IDFC Corporate Bond Fund
    The fund’s objective is to deliver returns through investments primarily in the corporate bond segment. It invests in high quality corporate bonds. 
Inception Date Jan12, 2016
Benchmark Name NIFTY AAA Short Duration Bond Index, CRISIL 10 Year Gilt Index
Fund Manager Anurag Mittal
Expense Ratio 0.27%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
9.36% 9.27% 8.93% 8.44% 8.51%

Credit Risk Fund

These types of mutual funds are relatively new in the market. These invest 65% of the corpus in debt instruments that have credit ratings below highest credit quality. These funds look out for high interest yielding low-rated bonds and may therefore be riskier as compared to other debt funds. Here is a list of top recommended credit risk funds and key statistics for investor reference:

  1. HDFC Credit Risk Debt Fund
    The fund objective is to generate income through capital appreciation in the long run by investments in corporate-issued securities that are rated AA or below. Investors who are looking for diversification through investment in debt instruments issued by corporates can consider investing in this fund.
Inception Date March 12, 2014
Benchmark Name NIFTY Credit Risk Bond Total Return Index
Fund Manager Shobhit Mehrotra
Expense Ratio 0.90%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
13.13% 10.35% 9.35% 8.99% 9.76%
  1. Kotak Credit Risk Fund
    The investment objective of this fund is to generate income through investments in debt and money market securities. It aims to maintain reasonable liquidity and invests in instruments that offer high accrual through marginally high credit risk. It is suitable for investors who have an approximately 15-month investment horizon.
Inception Date January 01, 2013
Benchmark Name CRISIL Composite AA Short Term Bond Index
Fund Manager Deepak Agarwal
Expense Ratio 0.67%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
10.73% 8.52% 8.31% 8.51% 9.13%
  1. IDFC Credit Risk Fund
    The fund aims to generate returns by investing primarily in AA and below rated corporate debt securities across varying maturities. This fund is rated as moderate-high risk.
Inception Date March 03, 2017
Benchmark Name Nifty AAA Short Duration Bond Index
Fund Manager Arvind Subramanian
Expense Ratio 0.66%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year Since Inception
8.49% 8.43% 8.19% 7.79%

Gilt Funds

Mutual Funds that invest a minimum 80% of their corpus in government securities (G Secs) with different maturities are known as Gilt Funds. Investors with no risk appetite prefer these because of minimal or zero credit risk involved. Here are the top recommended gilt funds and key statistics for investor reference:

  1. UTI Gilt Fund
    The fund aims to generate capital appreciation through investment in long-term government securities focusing on a falling interest rate environment. Investments are made primarily in highest rated instruments (like government securities) to limit the credit risk.
Inception Date January 21, 2002
Benchmark Name CRISIL Dynamic Gilt
Fund Manager Amandeep Chopra
Expense Ratio 0.66%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
4.31% 10.10% 9.46% 9.42% 9.41%
  1. Kotak Gilt Investment Fund
    The investment objective of this fund is to generate risk free returns by investing in sovereign securities issued by the Central or State Government(s) or investing in reverse repos of such securities. It tries to actively manage the duration of investment to ensure minimal credit and interest rate risk for investors.
Inception Date January 21, 2013
Benchmark Name NIFTY All Duration G-Sec Index
Fund Manager Mr. Abhishek Bisen
Expense Ratio 0.47%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
6.49% 11.24% 10.87% 9.33% 9.16%

Fixed Maturity Plans (FMPs)

Fixed Maturity Plans are available for investment only during the initial offer period since these are close-ended funds. They come with a lock-in period that could vary across funds and could range from months to years. FMPs are preferred by investors because of their potential to provide superior and tax-efficient returns if one remains invested for at least three years. However, these do not guarantee consistent returns. 

Long Duration Funds

  1. ICICI Prudential Long Term Bond Fund
    The scheme aims to generate regular returns through an allocation of 75 % of funds in debt instruments and the balance in money market instruments. The plan tries to maintain an optimum balance between yield, risks and liquidity.
Inception Date January 1, 2013
Benchmark Name NIFTY Long Duration Debt Total Return Index
Fund Manager Manish Banthia, Anuj Tagra
Expense Ratio 1.41%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
5.14% 10.72% 10.35% 9.49% 9.31%
  1. SBI Magnum Medium Duration Fund
    The scheme invests across various debt and money market securities as per its investment objective. It aims to provide attractive risk-adjusted returns to investors through active management of credit risk and interest rate risk.
Inception Date November 12, 2003
Benchmark Name NIFTY Medium Duration Debt Index
Fund Manager Mr. Dinesh Ahuja
Expense Ratio 0.68%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
9.56% 11.01% 10.08% 10.20% 10.06%

Dynamic Bond Funds

  1. IDFC Dynamic Bond Fund
    The objective of this fund is to generate long-term returns by active management. It primarily invests in money market & debt instruments including G-Sec across various durations.
Inception Date June 25, 2002
Benchmark Name Crisil Composite Bond Fund Index, CRISIL 10 Year Gilt Index
Fund Manager Suyash Choudhary
Expense Ratio 0.56%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
6.59% 11.50% 10.85% 9.49% 9.53%
  1. Axis Dynamic Bond Fund
    This open-ended scheme endeavors to generate optimal returns while ensuring liquidity through active management of investments in debt and money market instruments.
Inception Date January 01, 2013
Benchmark Name NIFTY Composite Debt Total Return Index
Fund Manager R Sivakumar, Devang Shah
Expense Ratio 0.25%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
8.26% 11.32% 10.55% 9.33% 9.61%

Banking & PSU Funds

Banking & PSU Funds are open-ended debt funds that invest primarily in debt instruments of banks, Public Sector Undertakings (PSUs), and Public Financial Institutions as defined by SEBI. Till recently, these were known as short-term or income funds. 80% of the fund corpus is invested in debentures, bonds, and certificates of deposit of banks and PSUs. Here are the top fund recommendations under this category:

  1. Axis Banking & PSU Debt Fund
    This open-ended scheme aims to generate stable returns through investments in debt and money market instruments issued by banks, Public Sector Units & Public Financial Institutions.
Inception Date January 01, 2013
Benchmark Name NIFTY Banking and PSU Debt Total Return Index
Fund Manager Aditya Pagaria
Expense Ratio 0.31%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
7.60% 9.31% 9.16% 8.48% 8.69%
  1. Aditya Birla Sun Life Banking & PSU Debt Fund
    The scheme aims to generate reasonable returns through investment focus in debt and money market securities that are issued by Banks, Public Sector Undertakings (PSUs) and Public Financial Institutions (PFIs) in India.
Inception Date April 20, 2002
Benchmark Name NIFTY Banking and PSU Debt Total Return Index
Fund Manager Mr. Kaustubh Gupta, Mr. Harshil Suvarnkar
Expense Ratio 0.35%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
8.34% 9.81% 9.28% 8.72% 9.46%

Points to consider before in a Debt Mutual Fund

Some of the important factors that investors must keep in mind while investing in debt mutual funds are:

  1. Investment Horizon: Investors must select a debt fund depending on their investment tenure. If one has an investment tenure of a year or less, it is best to opt for liquid funds and ultra short-term funds. For tenure of 1-3 years, the ideal option is short-term bonds. Medium-term objectives of 3-5 years can best be met by corporate bond funds or dynamic bonds. Longer the tenure, the higher the chances of better returns, unless the interest rates are rising.
  2. Investment Objective: Selection of debt funds can also depend upon personal investment goals. Whether the investment is being made to generate additional sources of income post-retirement or is having liquidity the main objective? Some investors also use debt funds to generate extra income other than a monthly salary
  3. Risk: Debt Funds come with lower risk as compared to equities. However, these are exposed to credit and interest-rate risks. If a fund invests in low-credit quality bonds, there will be a higher credit risk. An interest rate risk arises when the prices of the bond fall because of an increase in the interest rates. The portfolio value could go down if there is a delay or default of payment of interest and capital.
  4. Returns: Although debt funds are fixed-income securities, there is no guarantee of returns as the returns are linked to various factors. The net asset value of debt funds is in direct proportion to the interest rates in the economy. The fund value could fall with rising interest rates and is therefore suitable for investment during a falling interest rate regime. 
  5. Cost: Debt Funds charge a fee towards the management of the investment portfolios, and these are called expense ratios. Since these tend to have lower rates of returns compared to equity funds, it is important to remain invested in debt funds for longer time horizons. To protect investors against a higher expense ratio, SEBI mandates mutual funds to have an upper limit of 2.00% for schemes with a specific corpus size. 
  6. Tax: Capital gains generated from debt funds are taxable. The tax rate is based on the holding period or the tenure for which an investor stays invested in a debt fund. A capital gain made within three years of investment is known as a Short-Term Capital Gain (STCG). A capital gain made after three years or more is known as Long-Term Capital Gains (LTCG). While calculating taxable income, investors must add STCG from debt funds to total income. The tax rate applicable will be as per income slab. A fixed 20% tax after indexation is applicable on LTCG from debt funds.

How to invest in Debt Mutual Funds

Investing in Debt Mutual Funds is easy through the Finity app. Here are the steps that investors can follow for investing in debt mutual funds:

  1. Download and install the Finity app on your smartphone
  2. Click on the Debt option on home screen
  3. Depending on specific choice, you can select from the available options such as overnight funds, ultra short-term funds, short duration funds, etc.
  4. Within each category, the app will suggest various scheme options along with different time horizons.
  5. You can study the historical returns of the selected scheme and tap on ‘invest’ option against the chosen scheme.
  6. Enter the amount to be invested and click on continue.
  7. Select the monthly investment date and complete the payment.
  8. Enter the bank and personal details to complete the formalities and begin the investment.

Conclusion

Debt funds are considered less risky as compared to equity funds and are therefore preferred by investors with low-risk appetite. Depending on one’s risk tolerance, one can select from a wide variety of debt mutual fund options available in the market. It is important to study the risk and return profile of debt funds before making an investment decision.

FAQs

  1. What are Debt Mutual Funds?
    Debt Mutual Funds primarily invest in debt and other fixed-income securities such as, Central or State government securities, corporate bonds, money market instruments, commercial papers, corporate debentures, etc.
  1. What are Short Term Government Bond Funds?
    These funds invest in fixed income and debt instruments that have short-term maturity. The investment is only made in Central and State government issued instruments.
  1. What are Liquid/Money Market Funds?
    These funds invest in Money market instruments and securities that have very short term maturity, generally less than 90 days. These funds generally do not get impacted with interest rate movements and aim to provide stable returns to investors.
  1. What are Ultra Short-Term Funds?
    Ultra short-term funds invest in fixed income instruments and debt securities that are highly liquid and have short-term maturities.
  1. How to invest in Mutual Funds?
    To invest in mutual funds, investors can make use of the Finity app on their smartphones. The process of investment through this app is very user-friendly and simple. It only takes a few minutes for an investor to complete all the steps and begin the investment.
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