20 Best Debt Mutual Funds to Invest in India (April 2023)

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 2023 in India you can consider investing in. Read on!

List of Best Performing Debt Mutual Funds to Invest in 2023

The following table provides the details of the best debt funds 2023 to invest in India (in no particular order):

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Performance of Best Debt Mutual Funds with Returns

1. Bank of India Short Term Income Fund

Bank of India Short Term Debt Fund could be 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: 

• NAV: ₹24.24
• AUM: ₹72.26 Cr
• Expense Ratio: 0.55%
• Risk: Moderate
• Minimum Investment: ₹5,000
• Minimum SIP: ₹1,000
• Annualised 3-Year Returns: 8.4%
• Annualised 5-Year Returns: 4%

2. Baroda BNP Paribas Credit Risk Fund

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: 

• NAV: ₹20.10
• AUM: ₹179.82 Cr
• Expense Ratio: 0.78%
• Risk: Moderately high
• Minimum Investment: ₹5,000
• Minimum SIP: ₹500
• Annualised 3-Year Returns: 10.3%
• Annualised 5-Year Returns: 7.5%

3. UTI Bond Fund

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:

• NAV: ₹66.94
• AUM: ₹285.98 Cr
• Expense Ratio: 1.29%
• Risk: Moderate
• Minimum Investment: ₹1,000
• Minimum SIP: ₹500
• Annualised 3-Year Returns: 10%
• Annualised 5-Year Returns: 4.2%

4. ICICI Prudential All Seasons Bond Fund

Considered as one of the top-performing debt funds, ICICI Prudential All Seasons Bond Fund has 100.4% investment in debt, of which 47.8% is in government securities, 23.2% in financial services, and 15.6% in construction. The fund could be suitable for investors who want to invest money for longer duration but prefer less risky assets compared to equity funds. Let’s look into the fund details:

• NAV: ₹32.81
• AUM: ₹6,754.59 Cr
• Expense Ratio: 0.62%
• Risk: Moderate
• Minimum Investment: ₹5,000
• Minimum SIP: ₹100
• Annualised 3-Year Returns: 7.2%
• Annualised 5-Year Returns: 8.1%

5. UTI Short Term Income Fund

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:

• NAV: ₹28.12
• AUM: ₹2,269.82 Cr
• Expense Ratio: 0.33%
• Risk: Low to Moderate
• Minimum Investment: ₹500
• Minimum SIP: ₹500
• Annualised 3-Year Returns: 7.9%
• Annualised 5-Year Returns: 5.4%

6. Axis Corporate Debt Fund

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:

• NAV: ₹14.97
• AUM: ₹3,783.06 Cr
• Expense Ratio: 0.22%
• Risk: Moderate
• Minimum Investment: ₹5,000
• Minimum SIP: ₹1,000
• Annualised 3-Year Returns: 6.7%
• Annualised 5-Year Returns: 7.3%

7. HDFC Credit Risk Debt Fund

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). It could have a relatively high interest rate and credit risk.

• NAV: ₹21.59
• AUM: ₹8,437.56 Cr
• Expense Ratio: 0.96%
• Risk: Moderately High
• Minimum Investment: ₹100
• Minimum SIP: ₹100
• Annualised 3-Year Returns: 7.4%
• Annualised 5-Year Returns: 7.6%

8. Aditya Birla Sun Life Corporate Bond Fund

Aditya Birla Sun Life Corporate Bond Fund is an open-ended debt fund which could be ideal for investors who want to invest money for longer duration but prefer less risky assets compared to equity funds. Let’s look into the scheme details:

• NAV: ₹95.61
• AUM: ₹12,120.62 Cr
• Expense Ratio: 0.31%
• Risk: Low to Moderate
• Minimum Investment: ₹100
• Minimum SIP: ₹100
• Annualised 3-Year Returns: 6.6%
• Annualised 5-Year Returns: 7.4%

9. Bandhan Government Securities Fund Investment Plan

This fund has 98.3% investment in Debt, of which 98.3% is in sovereign securities. The scheme is ideal for investors looking for long-term capital growth. Here are the scheme details:

• NAV: ₹31.44
• AUM: ₹1,409.88 Cr
• Expense Ratio: 0.62%
• Risk: Moderate
• Minimum Investment: ₹5,000
• Minimum SIP: ₹1,000
• Annualised 3-Year Returns: 5.5%
• Annualised 5-Year Returns: 8.4%

10. SBI Magnum Income Fund

The scheme aims to invest its corpus in the entire range of debt and money market securities in line with its investment objective to provide risk-adjusted returns. Let’s check out the scheme details:

• NAV: ₹63.20
• AUM: ₹1,510.81 Cr
• Expense Ratio: 0.80%
• Risk: Moderately High
• Minimum Investment: ₹5,000
• Minimum SIP: ₹500
• Annualised 3-Year Returns: 6.2%
• Annualised 5-Year Returns: 7.7%

11. Aditya Birla Sun Life Medium Term Plan

This scheme has 92.2% investment in debt, of which 33.4% is in government securities. This fund could be ideal for investors who want to stay invested for 1-3 years and are looking for higher returns potential than bank deposits. Here are the fund details:

• NAV: ₹34.24
• AUM: ₹1,652.35 Cr
• Expense Ratio: 0.86%
• Risk: Moderately High
• Minimum Investment: ₹1,000
• Minimum SIP: ₹1,000
• Annualised 3-Year Returns: 14.1%
• Annualised 5-Year Returns: 8.5%

12. UTI Banking & PSU Debt Fund

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:

• NAV: ₹18.76
• AUM: ₹524.57 Cr
• Expense Ratio: 0.24%
• Risk: Moderate
• Minimum Investment: ₹5,000
• Minimum SIP: ₹500
• Annualised 3-Year Returns: 7.2%
• Annualised 5-Year Returns: 5.6%

13. Nippon India Money Market Fund

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:

• NAV: ₹3,547.52
• AUM: ₹10,718.42 Cr
• Expense Ratio: 0.21%
• Risk: Moderate
• Minimum Investment: ₹500
• Minimum SIP: ₹100
• Annualised 3-Year Returns: 5.1%
• Annualised 5-Year Returns: 6.3%

14. ICICI Prudential Banking & PSU Debt Fund

This scheme has 91.3% investment in debt, of which 28.6% is in government securities and the rest in moderately 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:

• NAV: ₹28.50
• AUM: ₹7,265.90 Cr
• Expense Ratio: 0.38%
• Risk: Low to Moderate
• Minimum Investment: ₹5,000
• Minimum SIP: ₹100
• Annualised 3-Year Returns: 6.4%
• Annualised 5-Year Returns: 7.1%

15. UTI Ultra Short Term Fund

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:

• NAV: ₹3,848.19
• AUM: ₹2,130.63 Cr
• Expense Ratio: 0.45%
• Risk: Moderate
• Minimum Investment: ₹5,000
• Minimum SIP: ₹500
• Annualised 3-Year Returns: 6.0%
• Annualised 5-Year Returns: 5.7%

16. Nippon India Ultra Short Duration Fund

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:

• NAV: ₹3,742.23
• AUM: ₹5,114.77 Cr
• Expense Ratio: 0.38%
• Risk: Moderate
• Minimum Investment: ₹100
• Minimum SIP: ₹100
• Annualised 3-Year Returns: 6.8%
• Annualised 5-Year Returns: 5.9%

17. ICICI Prudential Ultra Short Term Fund

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:

• NAV: ₹25.30
• AUM: ₹12,447.39 Cr
• Expense Ratio: 0.39%
• Risk: Moderate
• Minimum Investment: ₹5,000
• Minimum SIP: ₹1,000
• Annualised 3-Year Returns: 5.6%
• Annualised 5-Year Returns: 6.7%

18. Aditya Birla Sun Life Low Duration Fund

Aditya Birla Sun Life Low Duration fund seeks to invest in a diversified portfolio of debt and money market instruments of short maturities.Here are the scheme details:

• NAV: ₹611.45
• AUM: ₹10,035.61 Cr
• Expense Ratio: 0.39%
• Risk: Moderate
• Minimum Investment: ₹100
• Minimum SIP: ₹100
• Annualised 3-Year Returns: 6%
• Annualised 5-Year Returns: 7%

19. UTI Treasury Advantage Debt Fund

UTI Treasury Advantage Fund is a low-duration fund which invests in quality debt and money market instruments to provide reasonable returns with relatively 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:

• NAV: ₹3,046.04
• AUM: ₹2,565.55 Cr
• Expense Ratio: 0.33%
• Risk: Low to Moderate
• Minimum Investment: ₹10,000
• Minimum SIP: ₹500
• Annualised 3-Year Returns: 7%
• Annualised 5-Year Returns: 4.8%

20. Tata Money Market Fund

Tata Money Market Fund could be a viable alternative to liquid fund investors who are keen to invest in relatively safer short-term money market instruments. This scheme primarily invests in money market instruments. Let’s look into the scheme details:

• NAV: ₹4,048.06
• AUM: ₹8,814.20 Cr
• Expense Ratio: 0.17%
• Risk: Low to moderate
• Minimum Investment: ₹5,000
• Minimum SIP: ₹500
• Annualised 3-Year Returns: 5.3%
• Annualised 5-Year Returns: 4.8%

*Data as of 31st March, 2023

Disclaimer: Mutual fund investment is subject to market risk, read all scheme-related documents carefully.

How Do Debt Mutual Funds Work?

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. 

Advantages of Investing in Debt Mutual Funds

Here are the benefits of debt funds:

1. Higher Returns Compared to Fixed Deposits

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

2. 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.

3. Can be Combined with Equities

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

4. 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.

5. 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.

Who Should Invest in Debt Mutual Funds?

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. 

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How to Choose a Debt Mutual Fund?

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

1. 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.

2. 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.

3. 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. 

4. 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.

5. 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.

6. 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. 

7. 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. 

8. 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.

9. 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.

10. 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.

Factors to Consider Before Investing in Debt Mutual funds

Here are some of the factors you could consider before investing in debt mutual funds:

1. Investment Objective

It’s important to have a clear understanding of your investment objective. Make sure that your investments are aligned to your investment goals. 

2. Risk Tolerance

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.

3. Maturity of the Portfolio

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.

4. Quality of the Portfolio

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.

5. Expense Ratio

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. 

Taxation on the Best Debt Mutual Funds

From April 1, 2023, capital gains from debt funds will no longer enjoy indexation benefits. The gains will be added to your taxable income and taxed as per the taxpayer’s applicable income tax slab rate.

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 2023 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 ₹10!

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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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