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Best Debt Funds in India 2019

Debt mutual fund investment is good for short term financial goals. The returns from debt funds are lower than the equity funds but higher than bank fixed deposits. If you are looking for the best debt funds to invest in, then this article is for you.

Debt mutual funds invest a major portion or the entire corpus in debt instruments to earn fixed income and a small portion in money market instruments to maintain liquidity.

Examples of debt instruments include government securities, corporate bonds, and debentures. And the money market instruments are treasury bills, commercial papers, and certificates of deposits.

The prime objective of debt mutual funds is to generate a regular fixed income stream and grow corpus through stable and steady appreciation of fund. This makes it suitable for risk-averse investors who have a 1-5 year investment horizon.

The investment objectives for which the debt funds can be used are;

  • For building a corpus to buy a dream car or bike
  • Creating a foreign vacation fund
  • For retiring an outstanding loan or debt
  • Accumulating wealth for the wedding or any other purposes

Investing in a debt fund means that the investor is looking for stability over returns as that’s what is more important for short term financial goals. The returns from debt funds are lower than the equity funds but higher than bank fixed deposits.

Benefits of Investing in a Best Debt Mutual Funds

1. Investments Are Stable and Less Volatility

Debt mutual funds invest in highly rated fixed income bearing securities which are more predictable and relatively more stable. This gives you a better picture of the amount of return that you will have at the end of the period.

Plus, debt mutual funds help you increase the overall stability of your investment portfolio.

2. Better Post-Tax Returns

The returns generated from debt funds are in two forms;

  • Dividends or interest payments
  • Capital gains based on the tenure of holding

While interest earned on the bank and corporate fixed deposits are fully taxable in the hands of the investor, the returns from debt funds can be structured as dividend income.

Investors do not have to pay any tax on dividend income as dividend distribution tax is already paid by the fund houses.

Alternatively, if an investor opts for a growth option and holds units for more than 3 years then the gains from debt investments are classified as long term capital gains (LTCG). LTCG from debt funds is taxed at 20% with indexation benefits.

3. Various Investment Horizon

Unlike equity mutual funds that are suitable for long-term periods, debt funds are suitable for varying periods ranging from one day to over 5 years.

Hence, they cater to a wide range of investment goals like creating a corpus of an emergency fund, tax savings, and build wealth for vacation, wedding and asset purchase.

4. Opportunity to Invest in Debt Instruments 

Individual debt securities have a higher investment limit, with face value starting from Rs. 10,000 for a T-bill to Rs. 5 Crore for dated government security, which retail investors cannot afford to invest.

On the other hand, debt mutual fund provides that opportunity for investors, which otherwise will require large capital outlay.

5. Avenue to Park Short-Term Surplus Fund

Due to volatility, placing surplus funds in equity mutual funds for the short-term is an unwise proposition.

Debt mutual funds provide an avenue to park surplus funds and earn stable and returns as compared to other options.

Who Should Invest in the Best Debt Funds

The investment objective of debt funds is to earn regular interest income with stable capital appreciation. Most debt instruments have a fixed interest rate and maturity period. This makes returns far more predictable.

1. Investors Looking for Debt Exposure

Many debt securities are out of reach for retail investors due to their high face value. In such a scenario debt mutual funds are the best way to invest in debt instruments.

2. Conservative Investors

Debt funds are a great choice for conservative investors who want to earn a regular income. Such risk-averse investors are not in a position to lose their capital or get exposed to high-volatility equity investment. However, they will not be able to beat inflation.

3. Individuals Who Want Less Volatile Investments

Some Debt funds have very little risk associated with them . The risks normally associated with debt funds such as interest rate risk, credit risk, and liquidity risk gets significantly reduced by investing in low duration and highly rated debt instruments.

Hence, debt funds are best for investors who want to generate wealth in a less volatile manner.

4. Investors looking for Regular Income

Debt funds invest in securities that generate regular interest income and therefore are best for investors looking for a predictable and source of income.

5. Investors with Short to Medium Term Horizon

Short-term investment horizon ranges from 3 months to a year, while medium-term ranges from 3 years to 7 years.

Debt funds do not prioritise high returns. They generate adequate but stable returns that fulfill the fund investment objective. Thus debt funds are suitable for investors looking for short to  medium-term investment horizon.

Best Debt Funds in India

1. Tata Liquid Fund (G)

Tata Liquid Fund (Growth) is benchmarked to CRISIL Liquid Fund Index. The scheme objective is to generate reasonable returns with high liquidity to the unit-holders.

You can start investing in Tata Liquid Fund by making the first minimum investment of Rs. 5000 or a monthly SIP of Rs. 1000.

The fund invests in debt instruments like CD (14.35%), T-Bills (15.14%), NCD & bonds (0.49%) and the rest in CP (60.88%).

The salient features of  Tata Liquid Fund (G) (as on 1st August 2019) are as under;

Features
Tata Liquid Fund (Growth)
Managed by
Tata Asset Management Limited
Asset class
Debt
AUM
Rs. 20,838 Crore
Yield to maturity
6.36%

2. Kotak Savings Fund (G)

Kotak Savings Fund is an open-ended debt mutual fund scheme benchmarked to the NIFTY Ultra-short duration debt index.

The investment objective of the fund is to generate returns through investments in debt and money market instruments with a view to reduce the interest rate risk.

The Kotak savings fund is a moderately low-risk fund that invests in  certificate of deposits, commercial papers, non-convertible debentures, and bonds.

You can start with the first minimum investment amount of Rs. 5000 or with a SIP of Rs. 1000 for 12 months.

The details of the fund (as on 1st August 2019) are as under

Parameters
Kotak Savings Fund (G)
Asset Management Company
Kotak Mahindra Asset Management Company Limited
Asset Class
Debt
AUM
Rs. 12,994 Crores
Yield to maturity
7.01%

3. ICICI Prudential Savings Fund (G)

ICICI Prudential Savings Fund (G) is an open-ended debt mutual fund scheme benchmarked to the NIFTY low duration debt index.

The investment objective of the fund is to generate income through investments in a range of debt and money market instruments while maintaining the optimum balance of yield, safety and liquidity.

The ICICI Prudential savings fund is a moderately low-risk fund that invests in certificate of deposit, commercial paper, T-bills, government securities, non-convertible debentures and bonds.

You can start with a first minimum investment amount of Rs. 5000 or with a SIP of Rs. 1000 for 12 months. 

The details of the fund (as on 1st August 2019) are as under

Parameters
ICICI Prudential Savings Fund (G)
Asset Management Company
ICICI Prudential Asset Management Company Limited
Asset Class
Debt
AUM
Rs. 19,162 Crores
Yield to maturity
7.28%

Conclusion 

Using debt funds investors stand to generate tax optimized returns. Plus, debt funds provide an opportunity to generate wealth in a stable and less volatile way for short term goals and it should be part of every investor's investment portfolio.

In case of any doubts or questions, please feel free to ask in the comments section below, we will try and respond as early as possible.

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