Best Debt Mutual Funds in India – Details & Comparison

Debt Mutual Funds offer several benefits. But most of the small and retail investors know little about them and prefer to invest in Fixed Deposits or Recurring Deposits.

Debt Funds can give better returns than your Savings Bank Account & Bank deposits. Safety of capital is almost the same with both the options (Debt MFs & FDs). FDs may offer you assured returns but Debt funds can offer you higher post-tax returns. (You may like reading – ‘Are Bank Fixed Deposits really safe?’)

If you have any financial goal(s) which is less than 5 years away, which can be met with 8% to 10%, rate of return (or) when you are not comfortable with high volatility (risk) then you can surely consider investing in Debt Mutual Funds.

The returns from Debt funds are mainly dependent on the ‘interest rate’ scenario that is prevailing in the economy. If interest rates are in downward trend, most of the long-term or dynamic debt mutual funds can give better returns than bank fixed deposits. RBI may not be done with ‘Interest Rate Cuts‘. We may see further rate cuts in the future based on the Inflation and Macro-economic data.

Some of the debt mutual funds especially Dynamic bond funds, Gilt funds and Long-term debt funds have given better returns than bank Fixed Deposits over the last 1 to 2 year period.

In this post, let us look at some of the top performing and best Debt Mutual Funds that you can consider for your short or medium term goals.

For details on different types of Debt mutual funds, their benefits and when to invest in debt funds, you may kindly read – ‘Debt Funds – Types, Benefits & Risk Vs Return’.

Methodology to shortlist Top rated Debt Mutual Funds

I have judiciously followed the below points to select the best Debt mutual funds;

• Funds are shortlisted based on the past performances (Returns).
• Selection among the top rated 5 to 6 AMCs with a proven track record in Debt Funds segment.
• Age of the funds.
• Quantum of AUM (Assets Under Management)
• Expense Ratio (What is Expense ratio? Expense ratio shows the amount that mutual funds charge for managing the investors’ money)
• Exit Load.
• Risk – Reward profile.
• Various Risk / volatility related Ratios.
• Based on the data available on CRISIL, Morningstar, Moneycontrol & Valueresearchonline portals.
• The current investment portfolios of the funds.
• The credit quality, interest rate sensitivity, modified duration & average maturity of the Funds’ portfolios have been given due importance. (If you are investing for short-term, ideally you have to pick funds which have limited/low sensitivity to interest rates. At the same time, if you are investing for medium to long-term duration, you may pick funds which have moderate to extensive sensitivity to interest rates. Funds which have high credit quality w.r.t their portfolios should be given high importance.)
• I have tried to identify top performing Debt mutual funds based on the Fund Categories like Liquid Debt Funds, Short-Term Debt Funds, Dynamic Bond Funds, Gilt Funds, Monthly Income Plans etc.,

Top & Best Debt Mutual Funds in India for 2017

Below are some of the top performing and highly rated category-wise debt mutual funds;

Best Liquid Debt Funds 

Liquid funds invest in highly liquid money market instruments that provide easy liquidity. The period of investment in these funds could be as short as a day. Axis Liquid fund, HDFC Liquid Fund and Birla Sunlife Cash Plus funds are some of the top performing Liquid funds. The average liquid fund category returns in the last 3 months & 1 year are, 1.5% and 6.8% respectively. Franklin India’s Treasury Management Fund & ICICI Pru Liquid plan can also be considered for very short-term goals. Liquid funds are also best suited for saving a portion of your Emergency Fund.

If you want to park your surplus cash for very short-periods say 1 to 3 months, opt for these funds. Do not invest in Liquid Funds for a longer period as these offer low single-digit returns at best. Do note that these funds may or may not outperform your savings bank Account interest rate. (I had shortlisted same funds last year too.)

Best Ultra-Short Term Debt Mutual Funds

The Ultra Short-term debt funds are also known as Liquid plus funds or Cash / Treasury Management Funds. They generally invest in very short term debt securities with a small portion in longer term debt securities.

I had picked DWS Ultra Short Term Fund, Franklin Ultra Short Bond Fund & Axis Banking Debt Fund last year. This year, I am replacing the DWS & Franklin funds with L&T Ultra Short Term Fund & IDFC Banking Fund. The above funds’ portfolios are of very high credit quality and have low sensitivity to interest rates.

The average category returns generated in the last 3 months and 1 year are; 2% & 7.9% respectively. If you have surplus money which needs to be invested for say 3 to 12 months, you can consider investing in these funds.

Best Short-Term Debt MFs

Funds investing in slightly longer duration debt securities than Ultra short term funds are referred to as Short term funds. These funds are also referred to as Short-Term Credit Opportunities funds.

I had short-listed Birla Sunlife Short-term fund and HDFC Short Term fund last year. This year, I am replacing the HDFC Short Term Fund with Axis Short term fund and also including Franklin Low Duration Fund & L&T Short Term opportunities Fund. The above funds’ portfolios are of very high credit quality and have low sensitivity to interest rates. (HDFC Short Term Fund’s portfolio has been rated as ‘medium’ in terms of credit quality.)

The average fund category returns over the last 1 and 3 years are; 8.8% & 7.9% respectively. If you have surplus money which needs to be invested for say 6 to 18 months, you can consider investing in these funds.

Top & Best Dynamic Debt Funds

They invest a major portion in various debt instruments such as bonds, corporate debentures, government securities and money market instruments of various maturities and issuers. Dynamic Bond Funds invest in debt securities of different maturity profiles. These funds are actively managed and the portfolio varies dynamically according to the interest rate view of the fund managers.

During last year’s review on Debt Funds, I had selected TATA Dynamic bond & HDFC High Interest Fund under Dynamic Bond Funds category. I am continuing with the same funds and have also included Birla Sun life Dynamic Bond Fund & ICICI Pru Dynamic Bond Fund to the tracking list.

The average returns generated by the funds which are in Dynamic & Long-term income bond funds category during last 1 and 3 years are; 9.2% & 8.8% respectively.

These funds are suitable for investors who are willing to take a relatively higher risk and have longer investment horizon (say 1 to 5 years). Invest in a Dynamic Income fund if you want to gain from both rising and falling interest rate scenarios. But, dynamic funds can have high interest rate risk associated with it.

Best Gilt Funds

Gilt Funds invest in government securities of medium and long term maturities issued by central and state governments.

During last year’s review on Debt Funds, I had selected SBI Magnum Gilt Fund, IDFC’s G-Sec Fund and & L&T Gilt funds under Gilt Funds-Intermediate to Long-Term category. I am continuing with SBI and L&T Funds, but replacing IDFC fund with HDFC Gilt Fund – Long Term plan.

The average category returns for the last 1, 3 and 5 year are; 10.08%, 9.4% and 7.8% respectively. You can consider Gilt funds in a falling interest rate scenario.

Best Monthly Income Plans / Hybrid – Debt Oriented Plans

These funds invest in a mix of Debt and Equity in the proportions of say 80:20 or 70:30 or other proportions of similar kind. The objective of these funds is to provide enhanced regular returns to risk-averse investors by taking small positions in equity assets.

For complete details on Monthly Income Plans, kindly read – “Top & Best Monthly Income Plans “.

For more details on Child Mutual Fund – Debt oriented plans, kindly read – “Children’s Gift Funds – Review“.

In most of the scenarios, investing in best debt mutual funds can be more beneficial than bank deposits, tax-free bonds and certain other fixed income securities. If you are in 20-30 per cent tax bracket, tax-efficient debt funds can be more beneficial to you than FDs. Also, if you have lump sum money to be invested in an Equity oriented Fund, you can opt for STP (Systematic Transfer Plan) from a Liquid Debt fund to an Equity fund of your choice (within same AMC).

Do you prefer to have debt mutual funds in your investment portfolio? Do you prefer investing in debt funds to bank fixed deposits? Kindly share your views.

(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (Annualized returns are for Debt Funds – Regular Plans & Growth option as on 26-Oct-2016.)