Debt mutual funds are mutual funds that invest in fixed-income securities such as corporate bonds, treasury bills, money market instruments, government bonds, and certificates of deposits among others. The main aim of these funds is to provide investors with a regular source of income through the interest earned on debt instruments. We have curated a list of the 20 best debt funds in India you can consider investing in. Read on!
The following table provides the details of the best debt funds to invest in India in 2023:
|Debt Mutual Fund||Features|
|Bank of India Short Term Income Fund||NAV: ₹22.31|
Expense Ratio: 1.06%
AUM: ₹76.57 Cr
|Baroda BNP Paribas Credit Risk Fund||NAV: ₹18.35|
Expense Ratio: 1.60%
AUM: ₹186.69 Cr
|UTI Bond Fund||NAV: ₹61.24|
Expense Ratio: 1.63%
AUM: ₹281.60 Cr
|ICICI Prudential All Seasons Bond Fund||NAV: ₹30.44|
Expense Ratio: 1.33%
AUM: ₹6264.50 Cr
|UTI Short Term Income Fund||NAV: ₹37.46|
Expense Ratio: 0.96%
AUM: ₹2245.56 Cr
|Axis Corporate Debt Fund||NAV: ₹14.17|
Expense Ratio: 0.93%
AUM: ₹2989.86 Cr
|HDFC Credit Risk Debt Fund||NAV: ₹20.06|
Expense Ratio: 1.57%
AUM: ₹8508.28 Cr
|Aditya Birla Sun Life Corporate Bond Fund||NAV: ₹93.14|
Expense Ratio: 0.47%
AUM: ₹12603.20 Cr
|IDFC Government Securities Fund Investment Plan||NAV: ₹29.02|
Expense Ratio: 1.24%
AUM: ₹1418.48 Cr
|SBI Magnum Income Fund||NAV: ₹58.65|
Expense Ratio: 1.46%
AUM: ₹1500.51 Cr
|Aditya Birla Sun Life Medium Term Plan||NAV: ₹31.56|
Expense Ratio: 1.51%
AUM: ₹1646.65 Cr
|UTI Banking & PSU Debt Fund||NAV: ₹18.33|
Expense Ratio: 0.57%
AUM: ₹527.11 Cr
|Nippon India Money Market Fund||NAV: ₹3468.20|
Expense Ratio: 0.34%
AUM: ₹10238.33 Cr
|ICICI Prudential Banking & PSU Debt Fund||NAV: ₹27.18|
Expense Ratio: 0.76%
AUM: ₹7161.85 Cr
|UTI Ultra Short Term Fund||NAV: ₹3591.72|
Expense Ratio: 0.96%
AUM: ₹2005.28 Cr
|Nippon India Ultra Short Duration Fund||NAV: ₹3408.83|
Expense Ratio: 1.18%
AUM: ₹4713.97 Cr
|ICICI Prudential Ultra Short Term Fund||NAV: ₹23.33|
Expense Ratio: 0.84%
AUM: ₹12472.16 Cr
|Aditya Birla Sun Life Low Duration Fund||NAV: ₹555.59|
Expense Ratio: 1.22%
AUM: ₹11744.26 Cr
|UTI Treasury Advantage Debt Fund||NAV: ₹2968.92|
Expense Ratio: 0.44%
AUM: ₹3008.98 Cr
|Tata Money Market Fund||NAV: ₹3946.23|
Expense Ratio: 0.42%
AUM: ₹8617.75 Cr
*Disclaimer: Mutual fund investment is subject to market risk, read all scheme-related documents carefully.
Bank of India Short Term Debt Fund is considered as one of the best debt funds based on its consistent performance. The fund is ideal for investors who want to invest for 1-3 years and are looking for alternatives to bank deposits. Let’s look into the scheme details:
Also considered as one of the best debt funds due to its high-return generating potential, Baroda BNP Paribas Credit Risk Fund has 92.2% investment in debt, of which 10.67% is in Government securities and 81.36% is in low-risk securities. Let’s look into the fund details:
UTI Bond Fund is an open ended medium to long duration fund investing in a well-diversified portfolio of good credit quality corporate bonds and government securities. The fund is suitable for investors with medium to longer term investment horizons of 3 years or more. Let’s look into the fund details:
Considered as one of the top-performing debt funds, ICICI Prudential All Seasons Bond Fund has 93.39% investment in debt, of which 46.3% is in Government securities, 47.05% is in low-risk securities. The fund is suitable for investors who want to invest money for longer duration but prefer less riskier assets compared to equity funds. Let’s look into the fund details:
UTI Short Term Income Fund features in the top 5 best debt funds because of its potential. The scheme has a well-diversified portfolio of money market and debt instruments while it tactically allocates to government securities. The fund is well positioned in the prevailing marketing condition to capture any yield movement in the 1-3 year. Let’s look into the fund details:
This fund has 96.02% investment in Debt, of which 22.47% in Government securities, 73.59% is in low-risk securities and is suitable for investors looking for long-term capital growth with less riskier assets compared to equity funds. Let’s look into the scheme in detail:
HDFC Credit Risk Debt Fund is an open ended debt scheme predominantly investing in AA and below rated corporate bonds (excluding AA+ rated corporate bonds). A relatively high interest rate risk and relatively high credit risk.
Aditya Birla Sun Life Corporate Bond Fund is an open-ended debt fund ideal for investors who want to invest money for longer duration but prefer less riskier assets compared to equity funds. Let’s look into the scheme details:
This fund has 98.79% investment in Debt, of which 98.79% in Government securities. The scheme is ideal for investors looking for long-term capital growth. Here are the scheme details:
The scheme aims to invest its corpus in the entire range of debt and money market securities in line with the investment objective to provide attractive risk-adjusted returns. Let’s check out the scheme details:
This scheme has 4.58% investment in debt, of which 25.3% in Government securities, 66.97% is in low-risk securities. This fund is ideal for investors who want to stay invested for 1-3 years and are looking for a better alternative to bank deposits. Here Are the fund details:
UTI Banking and PSU Debt Fund is an open-ended debt scheme investing primarily in high quality debt securities issued by Banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds, having AAA and equivalent credit rating (at the time of investment). Let’s look into the scheme details:
The main objective of the scheme is to generate optimal returns consistent with moderate levels of risk and liquidity by investing in money market instruments. Here are the scheme details:
This scheme has 97.68% investment in debt, of which 28.97% is in Government securities, 68.71% is in low-risk securities. Investors with a low-risk appetite looking for better returns than bank deposits could consider investing in this fund. Let’s look into the scheme details:
UTI Ultra Short Term Fund is an accrual-oriented income fund with a diversified portfolio of debt and money market instruments which aims to generate risk-adjusted returns. Let’s look into the scheme details:
This is an open ended ultra-short term debt scheme investing in debt and money market instruments such that the Macaulay duration of the portfolio is between 3 – 6 months. Here are the scheme details:
This mutual fund scheme could be suitable for investors who aim to invest in a wide range of debt and money market instruments. You can use this scheme as a way to generate regular income via short-term parking of funds. Let’s look into the scheme details:
Aditya Birla Sun Life Low Duration fund seeks to invest in a diversified portfolio high credit quality debt & money market instruments of short maturities.Here are the scheme details:
UTI Treasury Advantage Fund is a low duration fund which invests in quality debt and money market instruments to provide reasonable returns with low volatility over the short-term. The portfolio duration of the fund is generally around 6 to 12 months which provides a high degree of liquidity. Here are the scheme details:
Tata Money Market Fund is a viable alternative to liquid fund investors who are keen to invest in safer short term money market instruments. The scheme primarily invests in money market instruments. Let’s look into the scheme details:
*Data as of 25 January 2023
A debt mutual fund invests in fixed-income generating securities such as government securities, corporate bonds, commercial papers, debentures, treasury bills, and money market instruments. These instruments are bought at a specific price and sold later at a margin. The difference that lies between the cost price and the selling price determines the appreciation or depreciation in the NAV (Net Asset Value) of the debt fund.
Debt securities carry a credit rating allowing investors to evaluate the chances of default by the issuer. Fund managers use these credit ratings to choose debt instruments. The underlying instruments generate periodic interests, which makes this investment option almost similar to fixed deposit schemes of banks.
The NAV of a debt fund largely depends on the underlying assets’ interest rates. Moreover, the market prices of debt securities depend entirely on the movement of the interest rates. Let’s understand this with an example. For instance, Aditya Birla Sun Life Low Duration Fund has 93.1% investment in debt, of which 8.94% in Government securities, 84.2% is in low-risk securities. This makes debt funds a low-risk investment option for investors with a low-risk appetite.
Here are the benefits of debt funds:
Debt funds have the ability to generate higher returns than bank fixed deposits and savings accounts.
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.
In the case of debt mutual funds, individuals are eligible for Indexation benefits. Also, there is no TDS for this investment avenue.
Investors looking to make profits in a bearish market can combine debt funds with equity investments to minimize losses.
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.
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.
Debt funds are ideal for investors who have a low-risk appetite and/or want to diversify their portfolio to mitigate risks involved with equity investments. These funds are also suitable for individuals who are looking for a relatively stable source of income other than bank deposits and are willing to accept lower returns.
Debt funds could be particularly suitable for those who are nearing retirement or for those who are looking to preserve capital. However, it is important to note that the performance of debt funds can be affected by changes in interest rates, and investors should carefully consider their risk tolerance and investment goals before deciding to invest in debt funds.
Here are the parameters for choosing a debt mutual fund to invest in:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Here are some of the factors you could consider before investing in debt mutual funds:
It’s important to have a clear understanding of your investment objective. Make sure that your investments are aligned to your investment goals.
Debt funds are considered to be less risky than equity funds, but they still come with some level of risk. It’s important to consider your risk tolerance and match it with the level of risk associated with the debt fund you are considering.
Debt funds invest in a variety of fixed income securities, such as bonds and Treasury bills, which have different maturities. Short-term funds invest in securities with a maturity of less than 3 years, while long-term funds invest in securities with a maturity of more than 10 years. It’s important to consider the maturity of the fund’s portfolio before investing.
The credit quality of the underlying securities held by the fund is an important factor to consider. High-quality bonds issued by the government or large corporations tend to be less risky than lower-quality bonds issued by smaller companies.
Compare the expense ratio of different funds before making a decision. Lower expense ratios mean that more of your investment is working for you. Funds with a higher expense ratio could eat into your returns, thereby reducing the margin of gains.
Debt funds are taxed differently based on the holding period and the type of fund, so it’s important to consider how the fund will be taxed before investing.
Please note that the taxation rate depends on the holding period of the investments. The details are elaborated below:
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. If you want to capture the high-returns generating equity market but are apprehensive of the risks, start investing with Navi Mutual Fund. Navi offers a host of low-cost index funds where you can start investing with just Rs.10!
Ans: Though debt mutual funds are usually associated with low risks, they carry interest rate risk and credit risk. In many instances, the fund might include low-rated securities that carry the possibility of default. In addition, a rise in interest rates may lead to a reduction in the prices of bonds. This is referred to as interest rate risk.
Ans: Short-term debt mutual funds can be considered better investment options than bank fixed deposits because they generate better returns. The liquidity and taxation benefits of these funds make it a lucrative option. Furthermore, portfolio diversification is another major advantage. Investors who wish to meet their financial objectives within three years can consider investing in short-term debt funds.
Ans: Taxation of debt funds depends on the holding period of the units a person has invested in. If an investor redeems his debt fund units within 3 years, the capital gains he earns are referred to as short-term capital gains and are taxed as per the investor’s income tax slab rate. If an investor redeems his investment after 3 years, the capital gains are referred to as long term capital gains. The LTCGs are taxed at 20% after indexation. In addition, cess and surcharge will be applicable.
Ans: Debt funds may generate negative returns due to fluctuations in the interest rate or defaults made by issuers of underlying assets. Investors need to be aware that debt mutual funds that have a longer maturity period can fall prey to interest rate risk. Furthermore, financial experts have also stated that there remains a possibility of debt funds with a shorter maturity period generating negative returns.
Ans: A debt mutual fund is a type of mutual fund that invests in fixed-income instruments like corporate bonds, government securities and treasury bills, among others. The primary aim of debt funds is to provide investors a stable source of income with returns higher than bank deposits but lower than equity investments.
Ans: Dividends earned from a mutual fund were tax-free in the hands of investors until 31 March 2020. However, the Finance Act, 2020 changed the method of dividend taxation. All dividends received on or after 1 April 2020 would be taxable in the hands of the investors as the DDT on dividends was withdrawn. The Finance Act, 2020 also imposes a TDS on dividend distribution by mutual funds on or after 1 April 2020. The standard rate of TDS is 10% on dividend income paid in excess of Rs 5,000 from a company or mutual fund.
Ans: Here are some of the best debt mutual funds in India:
1. Bank of India Short Term Income Fund
2. Baroda BNP Paribas Credit Risk Fund
3. UTI Bond Fund
4. UTI Short Term Income Fund
5. HDFC Credit Risk Debt Fund
Ans: You can buy debt mutual fund units via direct plans or regular plans. Direct plans involve buying mutual fund units via an asset management company (AMC). Whereas, regular plans involve buying mutual fund units through a third-party or broker.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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