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Best Debt Funds

Best Debt Funds - Consider the best performing debt mutual funds to invest in 2024 with Scripbox.com. Find the list of best debt funds in India on the basis of Returns, Latest Nav, Ratings, Performance etc

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Best Debt Funds to Invest in 2024

Fund Name1Y ReturnsExpense Ratio
Bandhan CRISIL IBX Gilt April 2028 Index fund (G)
Bandhan CRISIL IBX Gilt April 2028 Index fund (G)
6.2%0.41
Aditya Birla Sun Life Nifty SDL Plus PSU Bond Sep 26 60 40 fund (G)
Aditya Birla Sun Life Nifty SDL Plus PSU Bond Sep 26 60 40 fund (G)
6.7%0.36
ICICI Prudential Liquid Fund (G)
ICICI Prudential Liquid Fund (G)
7.2%0.29
HDFC Floating Rate Debt Plan (G)
HDFC Floating Rate Debt Plan (G)
7.9%0.52
Nippon India Arbitrage Fund (G)
Nippon India Arbitrage Fund (G)
7.8%1.06
BHARAT Bond FOF April 2031 fund (G)
BHARAT Bond FOF April 2031 fund (G)
7.2%0.06
Aditya Birla Sun Life Savings Fund (G)
Aditya Birla Sun Life Savings Fund (G)
7.5%0.55
BHARAT Bond FOF April 2030 fund (G)
BHARAT Bond FOF April 2030 fund (G)
7.0%0.06
BHARAT Bond ETF FOF April 2032 (G)
BHARAT Bond ETF FOF April 2032 (G)
7.3%0.06
Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund (G)
Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund (G)
6.6%0.35
HDFC Overnight fund (G)
HDFC Overnight fund (G)
6.7%0.14
Aditya Birla Sun Life Money Manager Fund (G)
Aditya Birla Sun Life Money Manager Fund (G)
7.6%0.34
Axis Dynamic Bond Fund (G)
Axis Dynamic Bond Fund (G)
6.6%0.57
ICICI Prudential Ultra Short Term Fund (G)
ICICI Prudential Ultra Short Term Fund (G)
7.2%0.82
ICICI Prudential Banking and PSU Debt Fund (G)
ICICI Prudential Banking and PSU Debt Fund (G)
7.2%0.74
UTI Liquid (G)
UTI Liquid (G)
7.2%0.27
Kotak Savings Fund (G)
Kotak Savings Fund (G)
7.0%0.81
Nippon India Banking & PSU Debt Fund (G)
Nippon India Banking & PSU Debt Fund (G)
6.6%0.76
Nippon India Nivesh Lakshya Fund (G)
Nippon India Nivesh Lakshya Fund (G)
7.9%0.60
ICICI Prudential Short Term Fund (G)
ICICI Prudential Short Term Fund (G)
7.3%1.07

Note : *NA implies that Fund is relatively new. Not enough data available

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What are Best Debt Funds?

A debt mutual fund is a mutual fund scheme that invests in fixed income generating instruments with lesser risk and lesser volatility like Certificate of deposit, Corporate Bonds, treasury bills, commercial paper, government securities. Debt mutual funds are also popularly known as Bond Funds or Fixed Income Bonds

The main objective of this fund is to provide regular and fixed interest during the investment period. Also, aim for capital appreciation for an investor.

The selection of assets for a debt mutual fund is based on the credit rating. A higher credit rating gives a higher assurance that the interest will be paid regularly and the principal amount invested will be repaid upon the maturity of the investment.

What are the Advantages of Investing in Debt Funds?

Below are the advantages of investing in debt mutual funds:

  1. Debt mutual funds carry less risk than equity funds, this scheme is ideal for an investor seeking stability
  2. These funds are highly liquid and an investor can anytime convert his investment into cash quicker than any other comparable investment option.
  3. The amount invested in debt mutual funds can easily be transferred to an equity mutual funds or any other scheme as per an investor’s choice. Such options are not available in other investment options. Example- FD can be closed but cannot be transferred
  4. Higher potential returns as compared to FD rates and saving account interest rates
  5. When a debt mutual fund is combined equity mutual funds, a portfolio is more stable due to diversification

Who Should Invest in Debt Mutual Funds?

Debt mutual funds are suitable for investors who wish to earn a fixed and regular income with less or no risk involved for a short duration. Usually, investors stay invested from a short to medium duration. Accordingly, investors choose the funds which match their investment horizon.

A Liquid fund is suitable for investors who look for a short or medium duration investment and generally park their surplus money either in fixed deposits or saving account. Liquid mutual funds can be withdrawn anytime just like a savings bank account and provide returns in the range of 7% to 9%.

How are Debt Mutual Funds Taxed?

For investments done before March 31st, 2023, the gains arising from debt mutual funds are taxed under Capital Gains depending on the holding period of the investment.

  • Short Term Capital Gain:
    STCG arises if the investment is held for less than 3 years from the date of investment in the fund
    STCG is levied on the capital gain arising from investment in a debt fund held for a period of less than 3 years. The capital gain will be added to the total income of an investor and the rate of tax will be as per the income tax slab rate. The income tax slab rate depends on the net taxable income and age of the taxpayer
  • Long Term Capital Gain:
    LTCG arises if the investment is held for more than 3 years from the date of investment in the fund
    LTCG is levied on the capital gain arising from investment in a debt fund held for a period of more than 3 years. LTCG is taxed at a rate of 20% after indexation.
    Indexation is a method of calculating the effect of inflation on the underlying asset. This effect is calculated from the date of purchase to the date of sale of the investments. Once indexation is applied, the purchase price is inflated. This provides an equilibrium in terms of inflation between the purchase price and sale price. Hence the quantum of capital gain is decreased due to indexation

As per the Finance Bill 2023, for investments done after April 1st 2023, the capital gains are taxable as per the investor’s income tax slab rate. The benefit of indexation for long-term capital gains is no longer available for debt mutual funds.

Taxation of Debt Mutual Fund

Taxation for investments made before March 31st 2023:

Period of holdingTaxation
Less than 1 yearSTCG- Taxed at Slab Rate
1 year to 3 yearSTCG- Taxed at Slab Rate
More than 3 yearsLTCG- 20% after indexation

For investments made after April 1st 2023, the capital gains are added to the investor’s taxable income and are taxed at the applicable slab rate. Thus, no LTCG tax benefit for debt mutual funds.

Different Types of Debt Fund

There are many types of debt mutual funds depending on the interest rate and maturity. An investor who wishes to invest in debt mutual funds must also consider which type of fund is most suitable for his investment terms.

The different types of debt mutual funds are listed below:

  1. Overnight Fund
  2. Liquid Fund
  3. Ultra Short Duration Fund
  4. Money Market Fund
  5. Short Duration Funds
  6. Medium Term Funds
  7. Long Duration Fund
  8. Dynamic Bond Fund
  9. Corporate Bond Fund
  10. Credit Risk Fund
  11. Banking and PSU Fund
  12. Gilt Fund
  13. Floater Fund

What are the Things to Consider as an Investor?

  • Risk: Debt mutual funds also carry risk and an investor must be aware and considerate of these risks while choosing debt mutual funds. The types of risk are listed below
    • Interest rate risk- Due to market fluctuation in interest rate, the fund value may fluctuate as well
    • Credit Risk- The risk of default in payment of the interest amount and principal amount invested. Here, the higher the credit score of a debt mutual fund the more reliable it is.
  • Cost: The fund houses charge a fee in exchange for maintenance of the fund by a fund manager known as the expense ratio. An investor must choose the fund with a lower expense ratio when compared to peer funds in the category
  • Investment horizon and objective: A period of 3 months to 12 months is ideal for investing in liquid funds, to invest for a longer period an investor must consider investing in short term bond funds. An investor must also set the ultimate objective of his investment and accordingly select amongst the different types of funds.

How to Choose the Best Debt Mutual Funds?

The average maturity of debt funds

The maturity of any debt fund is a very important criterion for any investor before selecting the most suitable debt fund to match with investment horizon and investment goals. Often, this is missed by investors and results in unnecessary risk.

The duration or maturity of a debt fund is important because it helps in optimizing returns at a given risk and maturity. Example- a liquid fund has an average maturity ranging from a few days to a month and it is a better option for an investor looking for an investment option for a few days. On the other hand, for investors looking for an investment option for say a year, short-term debt funds will be an ideal option.

Current yield and portfolio yield

The yield is the measure of interest income generated by the bonds. A higher coupon or yield of the invested debt instruments or bonds would mean a higher coupon of the entire portfolio.

The yield to maturity (ytm) of a fund means the present yield of the fund. An investor must always be keen to know-how is the extra yield being generated on the existing funds. Is this extra yield being generated through funds with lower quality? If this is the case it would mean the fund may default later.

Interest rate

In debt funds, one of the most important factors is the interest rate prevailing in the economy. An investor must understand the market environment w.r.t. Interest rate and its fluctuations.

The interest rate is directly related to the price or NAV of the bonds. With an increase in interest rate, the price of the bonds falls, and vice versa. While the interest rate increases, new bonds are introduced in the market which are attractive for new investors and values higher than current bonds. Here a repricing of current bonds takes place.

A debt fund portfolio which involves such older bonds will be impacted. With a rise in the interest rate, the value of these older bonds will decrease, having a negative impact on the overall portfolio.

Example

During the period of rising interest rates in the market, long term debt funds are at a higher risk. In such a scenario, investing in short term debt funds and liquid funds are a safer and better option

An investor who has a better understanding will always benefit from market conditions.

Expense Ratio

An expense ratio is a fee that the fund manager charges for the management of the portfolio. An expense ratio differs from fund to fund.

BPS is a unit to measure interest rates wherein one bps is equal to 1/100th of 1%.

Example

Liquid funds have an expense ratio of up to 50 bps while other debt funds charge up to 150 bps.

The expense ratios lower the net returns earned by the portfolio. Hence an investor must consider the expense ratios before selecting funds.

The credit rating of the portfolio

A credit rating is provided to all the debt instruments and bonds. This rating reflects the ability of the instrument or bond to repay the amount invested. The higher the rating, the lower is the level of default risk.

An investor who wants a safe and secure option for investment must consider AAA or AA+ rated instruments and bonds

Overview of the Top Debt Funds in India

ICICI Pru Liquid Fund (Growth)

This fund has also maintained a higher-than-average level of return predictability, while also ensuring the market determined risk is lowest among its category peers. In our view, the credit quality of the underlying holdings (current and historical) is better than the category average. With a past performance of 17 years, the fund has an extended history for analysis and the track record is excellent. With an AUM or relative size of Rs 34,602.577 cr, the scheme is the leader within the category of the liquid mutual fund.

HDFC Overnight Fund(G)

This fund has the lowest market determined risk (Liquidity risk & Credit risk), as measured by the YTM’s standard deviation. The 3-year daily rolling returns over the last five years is 4.74%, which is among the best in the category. Overall, the fund manager has ensured safety, without overtly compromising on returns. With a past performance of 20 years, the fund has an extended history for analysis and the track record is excellent. With an AUM or relative size of Rs 12,085.262 cr, the scheme is the leader within the category of the overnight mutual fund.

HDFC Floating Rate Debt Fund(G)

Launched in 2007, the fund has the highest average assets under the management of Rs. 14,559 crores, among its category peers. The fund has consistently delivered above-average 3 years rolling returns of 7.79% with the best level of return predictability. In our view, the fund has the lowest market determined risk as well. All these elements are put together to make this fund a “Scripbox Recommended Fund” within the floating rate category.  With a past record of 15 years, the fund has a sufficient history for analysis and the track record is good. The fund has a higher credit quality in comparison to other debt funds. The scheme is moderately impacted by interest rate fluctuations.

Aditya Birla SL Savings Fund-Reg(G)

Launched in 2001, the fund in terms of average assets under management at Rs. 16,987 crore, beats the rest of its category peers by a wide margin. The fund’s 3 year rolling returns for the last five years is 7.28%, which is among the top among its peers. The fund has consistently remained in the top quartile over multiple periods. Though the credit quality of the instruments is below average, the issuers are relatively strong. The market determined risk and the deviation in credit quality is one the lowest in the category. Owing to the AUM of Rs 14,667.698 cr the scheme is a leader in terms of the relative size of the scheme within its category

How to Invest in Debt Fund Through Scripbox

You can invest in Scripbox’s recommended best debt mutual funds in India by following the below-mentioned steps:

  1. Login to Scripbox
  2. Click on ‘Invest’
  3. Begin your investment journey by choosing ‘A plan to invest in’ or ‘I want to choose my own funds’
  4. Select the mode of investment, i.e., monthly SIP, one-time or STP
  5. Enter the amount of investment
  6. Based on the amount of investment, the recommended funds will be provided. You can change the funds and the distribution of the amount.
  7. Select the payment mode and complete the transaction to set up your investment. 

Frequently Asked Questions

Is it safe to invest in debt funds?

Yes, it is a relatively safe option to invest in debt mutual funds. Debt funds invest in government securities, corporate bonds, fixed income generating instruments Historically, these funds have provided a regular income with moderate to low risk on the invested amount.

Why are debt funds better than fixed deposits?

There are two reasons why debt mutual funds are considered a better option to invest than FD or saving account. Firstly, debt mutual funds do not have a lock-in period like FD. Secondly, historically debt mutual funds have delivered higher returns than FD rates.

What is the average maturity of debt funds?

Maturity is the time period for which the amount is invested in the scheme and on the expiry of this maturity period, the principal amount invested is redeemed. On average, the maturity period of debt funds is 5 years. However, an investor can choose to invest in schemes with any maturity period

Do debt funds have a lock-in period?

Debt mutual funds do not have a lock-in period, an investor can choose to withdraw anytime.

What is TREPs in a mutual fund?

TREPs are Tri-Party Repo agreements. TREPs allow the borrowing and lending of funds against Government Securities as collateral in a Triparty Repo arrangement. TREP is a repo contract in which a third party (Tri-party) acts as an intermediary between the borrower and lender. The role of the Tri-Party Agent is collateral selection, ensuring payments and settlements, custody and management of the contract. 
Clearing Corporation of India Ltd (CCIL) is the Central Counterparty to all trades from Tri-Party Repo Dealing System (TREPS). The following entities participate in TREPS: Mutual Funds, Banks, Financial Institutions, Pension Funds, NBFCs, Insurance Companies, Corporates, Primary Dealers, etc.