10 Best Debt Mutual Funds To Invest In India (Updated 2022)

Debt mutual funds usually invest in fixed-income securities such as corporate bonds, treasury bills, money market instruments, government bonds, and certificates of deposits among others. The main intention of these funds is to generate wealth in the form of interest income and a steady appreciation of the capital invested in the long run.

Check out this list of the 10 best debt funds if you’re exploring investment opportunities in debt mutual funds. Read on!

10 Best Debt Mutual Funds to Invest in 2022

S No.	Name of the Debt Mutual Fund	Features	Expense Ratio	5-year Annualised returns
1.	ICICI Prudential Constant Maturity Gilt Fund Direct Plan-Growth	Assets under management (AUM) as of October 20, 2021: Rs. 382.09 crores Net Asset Value (NAV) as of October 20, 2021: Rs. 10.6097	0.23% per annum	8.72%
2.	SBI Magnum Constant Maturity Fund Regular Plan IDCW	AUM as of October 20 2021: Rs. 800.99 crores NAV as of October 20 2021: Rs. 52.0779	0.32% p.a.	9.12%
3.	Edelweiss Government Securities Fund	AUM as of October 20 2021: Rs. 113 crores NAV as of October 20 2021: Rs. 20.4967	0.57% p.a.	8.61%
4.	** Navi Liquid Fund – Growth	AUM as of October 20 2021: Rs. 84.53 crores NAV as of October 20 2021: Rs. 2290.84	0.15% p.a.	3.17%
5.	Axis Gilt Fund Direct-Growth	AUM as of October 20 2021: Rs. 146.80 crores NAV as of October 20 2021: Rs. 21.25	0.40% p.a.	7.94%
6.	Kotak Dynamic Bond Fund Direct-Standard IDCW	AUM as of October 20 2021: Rs. 2964.18 crores NAV as of October 20 2021: Rs. 11.1364	0.52% p.a.	8.60%
7.	HDFC Credit Risk Debt Fund- IDCW Option- Direct Plan	AUM as of October 20 2021: Rs. 8606.99 crores NAV as of October 20 2021: Rs. 17.6724	1.08% p.a.	7.89%
8.	Aditya Birla Sun Life Corporate Bond Fund	AUM as of October 20 2021: Rs. 22,271 crores NAV as of October 20 2021: Rs. 88.633	0.3% p.a.	7.96%
9.	IDFC Government Securities Fund – Constant Maturity Direct-Growth	AUM as of October 20 2021: Rs. 1948.67 crores NAV as of October 20 2021: Rs. 29.9341	0.62% p.a.	9.02%
10.	SBI Magnum Income Direct Plan-Growth	AUM as of October 20 2021: Rs. 1700.27 crores NAV as of October 20 2021: Rs. 59.3898	1.35% p.a.	8.05%

** Terms & Conditions Apply

Also read: What Is A Debt Fund: Different Types of Debt Funds

How to Choose a Debt Mutual Fund?

Here are the parameters for choosing a debt mutual fund to invest in:

Expense Ratio

Expense ratio is the fee charged to investors by fund houses annually. The higher the expense ratio, the lower the returns. Choose a debt mutual fund that has a lower expense ratio.

Interest Rates

Debt mutual funds are affected by interest rates. Higher interest rates lead to a fall in bond prices. With the increase in interest rates, new bonds are issued that have a higher yield. As a result, the older bonds become of lower value. The Net Asset Value (NAV) also gets affected by these ‘older bonds’. High-interest rates also affect the long-term debt mutual funds. Investing in small-term debt funds during this time would be a safer bet at this time.

Duration of Maturity

Check the average duration of maturity in order to avoid taking unforeseen investment risks. Depending on your financial goal – whether you want returns within a few days, months or a year, you can check the maturity duration and invest in the funds that align with your goal.

Credit Quality

Checking the credit quality of the bonds can help you choose the best debt fund. Depending on the bonds’ ability to yield returns, they are assigned a credit rating. AAA is the best credit rating and is considered a safe investment. 

Portfolio Yield

Interest income generated by a bond is known as the portfolio yield or current yield. Bonds with higher coupon rates are considered to have a high portfolio yield. The parameter Yield to Maturity (YTM) of debt mutual funds indicates the running yield. Before investing, know how this extra yield is being generated. If it is generated at the cost of low portfolio quality, it may not be the best debt fund to invest in. 

Check AUM

AUM or Assets Under Management is a strong indicator of the fund’s performance. It refers to the market value of assets at a given point in time and includes the returns a fund has created as well as the capital a fund manager has to invest in new funds. Funds with higher AUM are considered to be safer to invest in.  

Also read: What is XIRR in mutual fund 

Things to Consider Before Buying Debt Mutual Funds

Fund Objectives

Debt funds invest in a variety of securities depending on their fund objectives. These funds can be expected to perform relatively predictably, making them ideal for wholly or partially risk-averse investors. 

Risks

Debt funds are known to carry a low degree of risk among mutual funds, but like all market-linked products, they can experience losses. Investments in low-credit-rated securities can result in credit risks while falling bond prices can lower returns. 

Returns

Even the top-performing debt mutual funds do not offer guaranteed returns as their rates are inversely proportional to market interest rates. Hence, could provide better returns in a falling interest regime and lower returns in a growing market.

Expense Ratio

Fund houses charge a certain expense ratio to manage the assets of a mutual fund. Since debt funds provide relatively low returns, make sure to pick one with a low expense ratio and long-term holding period.

Holding Period

If you want to temporarily park your emergency funds while earning modest returns, choose debt funds with the lowest holding period. On the other hand, if you want better returns, it is recommended to choose long term debt funds with a holding period of two years or more.

Also read: What Is A Hybrid Mutual Fund: Different types and their benefits

Advantages of Investing in Debt Mutual Funds

Here are the benefits of debt funds:

Higher returns compared to fixed deposits

Debt funds have the ability to generate higher returns than bank fixed deposits and savings accounts. 

High liquidity

Debt funds, especially liquid funds, are easily convertible into cash. If a financial emergency arises, investors can redeem their units quicker in comparison to other investment options, such as fixed deposits. 

Tax-efficient

In the case of debt mutual funds, individuals are eligible for Indexation benefits. Also, there is no TDS for this investment avenue. 

Can be Combined with Equities

Investors looking to make profits in a bearish market can combine debt funds with equity investments to minimize losses.

Low cost of investment

As per SEBI regulations, the expense ratio of debt funds cannot be more than 2%. Overnight funds and liquid funds charge an extremely low expense ratio, whereas dynamic bond funds and long-duration funds impose a higher expense ratio.

Partial withdrawals

Investors can partially withdraw from their funds to meet any necessary requirements without impacting the rest of their investment.

Besides these, debt funds can be effective as a hedge against volatility in the stock market. 

Disadvantages of Investing in Debt Mutual Funds

• Lower returns compared to equity funds.
• Extra costs like the salary of the fund manager, transaction and marketing costs, etc. are associated with debt mutual funds. 
• They are not completely risk-free. Fluctuating interest rates, lack of liquidity and credit risk are three risks that affect debt mutual funds. 
• These are managed by fund managers.
• Many debt funds make it confusing for new investors to choose the best debt funds to invest in. 

Final Word

Long term Debt mutual funds could offer better returns than FDs at lower risks compared to other types of mutual funds. They are often extremely liquid and could provide a steady and regular interest income, making them ideal for risk-averse investors. 

That being said, make sure to look at factors such as risk-return, expenses, financial goals, etc., to find the best debt mutual fund for your needs. You can invest in Navi’s debt funds such as Navi Liquid Fund or Navi Ultra Short Duration Fund to passively grow your investment. Make a purchase of Navi mutual funds through platforms such as Zerodha, Groww, Paytm Money, KFintech, Indmoney, etc.

Also Read: Capital Gains Tax on Mutual Funds

FAQs on Best Debt Mutual Funds

Before you go… 

• Looking for instant personal loans 24*7 anywhere, anytime? Install the Navi app on Android or iOS now!
• Or, maybe you’re looking to buy that house you’ve been eyeing and you need a loan of up to Rs. 10 crores. Install the Navi app on Android or iOS now and get instant in-principle approval right away! Interest rates starting at 6.71% p.a.
• How about an affordable health insurance policy starting at a monthly premium of just Rs. 241? Install the Navi app on Android or iOS now and get your policy in under 2 minutes
• Instead, want to put your savings into action and kick-start your investment journey But don’t have time to do research. Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.

Disclaimer- Mutual Fund investments are subject to market risks, read all scheme related documents carefully.