Best Debt Funds 2024 – Top 10 Performing Debt Mutual Funds
Debt mutual funds in India have become a popular investment choice for those seeking stable returns with relatively lower risk than equity investments. These funds primarily invest in fixed-income securities like government bonds, corporate bonds, treasury bills, and other money market instruments, thus making it a low-risk investment scheme compared to equity investment. To identify the best debt mutual funds that align with your investment goals, you should evaluate the fund’s performance, risk profile, investment strategy, and risk tolerance.
In this blog, we will delve deeper into identifying the best Indian debt funds in the last 5 yrs and explore the benefits of investing in debt mutual funds.
What are Debt Mutual Funds?
Debt mutual funds are investment schemes that primarily invest in fixed-income securities like bonds, treasury bills, and other money market instruments, aiming to provide investors with returns through interest income and capital appreciation.
Features of Debt Mutual Funds
- Diversification: Debt funds invest across various debt instruments, mitigating risk by spreading investments.
- Lower Volatility: Compared to equity funds, debt funds are less volatile, offering more stability to the investment portfolio.
- Liquidity: These funds provide high liquidity, allowing investors to buy or sell units easily without significant impact on the market price.
- Regular Income: They aim to deliver regular income through interest earnings, making them suitable for investors seeking steady returns.
- Tax Efficiency: Debt funds offer tax-efficient returns over the long term, especially through indexation benefits for investments held for more than three years.
Best Debt Funds in India (2024)
| Best Debt Mutual Funds | Sub Category | AUM (Rs. in cr.) | CAGR 5Y (%) | 3Y Avg Annual Rolling Return (%) | Expense Ratio |
|---|---|---|---|---|---|
| ICICI Pru Overnight Fund | Overnight Fund | 7,030.25 | 66.00 | 362.51 | 0.10 |
| Nippon India Nivesh Lakshya Fund | Long Duration Fund | 7,416.86 | 8.14 | 4.66 | 0.30 |
| Edelweiss Banking and PSU Debt Fund | Banking & PSU Fund | 295.88 | 7.98 | 5.39 | 0.39 |
| ICICI Pru Constant Maturity Gilt Fund | Gilt – Long Term Fund | 2,456.87 | 7.87 | 4.50 | 0.23 |
| HSBC Corporate Bond Fund | Corporate Bond Fund | 6,100.72 | 7.81 | 4.97 | 0.30 |
| Axis Dynamic Bond Fund | Dynamic Bond Fund | 1,708.41 | 7.70 | 5.12 | 0.26 |
| Bandhan G-Sec-Constant Maturity Plan | Gilt – Long Term Fund | 340.61 | 7.58 | 3.90 | 0.30 |
| Aditya Birla SL Short Term Fund | Short Duration Fund | 6,767.47 | 7.57 | 6.24 | 0.39 |
| Axis Strategic Bond Fund | Medium Duration Fund | 1,976.60 | 7.46 | 6.62 | 0.34 |
| SBI Magnum Constant Maturity Fund | Gilt – Long Term Fund | 1,652.73 | 7.43 | 4.43 | 0.31 |
Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.
Note: The list of debt mutual funds is derived from Tickertape Mutual Fund Screener and is as of 10th April 2024. The parameters used to curate the list are as follows:
- Category: Debt
- Plan: Growth
- 5Y Cagr: Sort from highest to lowest.
About Top 10 Performing Debt Funds in India
ICICI Pru Overnight Fund
ICICI Prudential Overnight Fund is the best-performing debt fund with a 5-yr CAGR of 66%. This debt fund with the highest return aims to offer low risk and high liquidity by primarily investing in overnight securities. With a highest 5-yr CAGR, it is the best performing debt mutual fund. With a low expense ratio of 0.1%, it caters to investors seeking short-term, low-risk investment options. The fund’s significant AUM of ₹7,030.25 cr. reflects its popularity and trust among investors. Managed by experienced professionals, it is an ideal choice for those looking to park their funds with minimal risk and expect quick liquidity.
Nippon India Nivesh Lakshya Fund
Nippon India Nivesh Lakshya Fund is among the best debt funds for the long term. This debt fund primarily invests in government securities, aiming for optimal returns with moderate risk levels. With 96.78% of its portfolio in government bonds, it’s designed for investors seeking long-term investment avenues. The fund has demonstrated a 5-yr CAGR of 8.14%, positioning it as a top debt fund for moderate risk options for those looking to invest in debt instruments.
Edelweiss Banking and PSU Debt Fund
Edelweiss Banking and PSU Debt Fund is a debt mutual fund that primarily invests in high-quality debt instruments of banks, public sector undertakings (PSUs), and public financial institutions. With an AUM of ₹295.88 cr. and a focus on AAA-rated and government securities, the fund aims to provide stable returns with lower risk, making it among the top debt mutual funds suitable for conservative investors seeking income over the medium to long-term horizons.
ICICI Pru Constant Maturity Gilt Fund
ICICI Prudential Constant Maturity Gilt Fund is a debt fund focusing on government securities with a 10-yr constant duration, aiming for stable returns with moderate risk. With an AUM of ₹2,456.87 cr. and a low expense ratio of 0.23%, it targets investors seeking long-term, inflation-beating returns. The fund predominantly invests in government bonds (96.38%), ensuring high credit quality and safety. It has shown commendable performance as this debt mutual funds returns is the highest among long duration funds. 7.87% 5-yr CAGR and low expense ratio make it the best Indian debt funds option for conservative investors looking for reliable income over an extended period.
HSBC Corporate Bond Fund
HSBC Corporate Bond Fund is a UK-based investment vehicle focusing on generating higher returns than the Markit iBoxx GBP Corporates Index plus 1% per annum over three-year periods. It primarily invests in investment-grade bonds issued or hedged back to sterling, including those by companies, supranational, or government-backed organisations.
Axis Dynamic Bond Fund
Axis Dynamic Bond Fund is a versatile debt mutual fund that dynamically adjusts its portfolio across different debt and money market instruments, aiming to manage interest rate volatility while seeking optimal returns. Launched on 1st January 2013, it has an AUM of ₹1,708.41 cr. as of 10th April 2024, with a 5-yr CAGR of 7.70%. The fund invests 96.83% in debt, including 30.92% in government securities and 65.91% in low-risk securities. It is among the best debt mutual funds suitable for investors looking for moderate-risk investment options with flexibility in bond selection.
Bandhan G-Sec-Constant Maturity Plan
Bandhan Government Securities Fund – Constant Maturity Plan is an open-ended debt scheme focusing on government securities with a constant maturity of 10 yrs, aiming for optimal long-term returns. It carries relatively high-interest rates and low credit risk, investing predominantly in government bonds, state development loans, treasury bills, and cash management bills. With an average maturity of around 10 yrs, it’s recommended for investors with a minimum investment horizon of over 3 yrs. Managed by Harshal Joshi since 15th May 2017, this top debt fund is suitable for those seeking ‘Satellite’ debt allocation for stable, long-term income.
Aditya Birla SL Short Term Fund
Aditya Birla Sun Life Short Term Fund is among the best short term debt funds that aims to generate income and capital appreciation by investing in a diversified portfolio of debt and money market securities. With a Macaulay duration of the portfolio between 1-3 yrs, it carries a relatively high-interest rate risk and moderate credit risk. It is among the best low duration debt funds, suitable for investors seeking income with capital growth over the short term (1 to 3 yrs). It offers high liquidity and a diversified portfolio starting at an investment of ₹1,000, making it the best debt fund for SIP.
Axis Strategic Bond Fund
Axis Strategic Bond Fund is an open-ended medium-duration debt fund aiming to generate optimal returns by investing across the debt and money market spectrum. With an AUM of ₹1,976 cr. and an expense ratio of 0.35%, the fund has delivered a 5-yr CAGR of 7.46%.
SBI Magnum Constant Maturity Fund
SBI Magnum Constant Maturity Fund is an open-ended debt scheme investing in government securities with a constant maturity of around 10 yrs. It aims to provide returns through investments predominantly in Central and State Government securities, carrying a relatively high-interest rate risk and low credit risk. With an AUM of ₹1,652 cr. and a 5-yr CAGR of 7.43%. The fund is managed with an active interest rate risk strategy, which is suitable for investors with a long-term investment horizon.
Advantages of Investing in Debt Mutual Funds
There are certain advantages of investing in the best debt mutual funds –
- Regular Income: Debt mutual funds often distribute income generated from the interest of the underlying securities. It is suitable for investors seeking a steady income stream.
- Lower Risk: Compared to equity investments, debt mutual funds generally offer lower risk. The risk is reduced due to investments in fixed-income securities, which typically have a predetermined interest rate and maturity date.
- Diversification Benefits: By investing in a variety of debt instruments, these funds help in spreading out risk. Diversification can protect against the poor performance of a single security or sector.
- Professional Management: Debt mutual funds are managed by experienced fund managers who make informed decisions on which securities to buy or sell. This expertise can potentially lead to better returns and risk management for the investor.
- Liquidity: These funds generally offer high liquidity, allowing investors to buy or sell their fund units on any business day. This feature is particularly beneficial for those needing to access their funds on short notice.
- Tax Efficiency: Unlike traditional fixed-income investments like bank fixed deposits, debt mutual funds can be more tax-efficient, especially for long-term investments. Long-term capital gains from debt mutual funds were previously taxed at a lower rate with indexation benefits, which helped reduce the tax burden. However, it’s important to note that tax laws are subject to change and can impact the tax efficiency of these investments.
- Indexation Benefit: For long-term investments, debt mutual funds offer the benefit of indexation, which adjusts the purchase price of investments for inflation before calculating capital gains tax. This could significantly reduce the tax liability. However, recent changes in tax laws have affected the availability of indexation benefits, so it’s crucial to stay updated on current tax regulations.
How to Select the Best Debt Fund for Investment?
When selecting the best debt mutual funds, investors should consider the following factors:
- Investment Objective: While identifying the best debt fund for investment, ensure the fund’s investment strategy aligns with your financial goals and investment horizon.
- Risk Profile: Assess the fund’s risk profile in terms of credit risk, interest rate risk, and liquidity risk.
- Past Performance: While past performance is not indicative of future results, it can provide insights into the fund manager’s expertise and the fund’s consistency.
- Expense Ratio: Lower expense ratios can lead to higher net returns for investors.
How Returns are Calculated on the Top Debt Mutual Funds?
Calculating returns on debt mutual funds involves several steps and factors, including the interest income from the securities in the fund’s portfolio, capital appreciation, and any dividends distributed. Here’s a step-by-step explanation on how returns are calculated on debt mutual funds –
Interest Income
The interest income can be calculated by summing up the interest received from each debt security in the portfolio. If a fund has multiple securities, you would calculate the weighted average of the interest income based on the proportion of each security in the portfolio.
Capital Appreciation
The price of bonds in the portfolio can increase or decrease based on interest rate movements. If interest rates fall, the price of existing bonds with higher interest rates generally rises, and vice versa. The capital appreciation or loss can be calculated as:
Capital Gain or Loss = (Selling Price – Purchase Price) * No. of Units
Dividend Distribution
If the fund opts to distribute income as dividends, this should be added to the total return. The dividend per unit can be calculated as:
Dividend Per Unit = Total Dividend Distributed / No.of Units Outstanding
Net Asset Value (NAV) Performance
The NAV reflects the value of each unit of the fund and is calculated as:
NAV = Total Assets – Total Liabilities / No. of Units Outstanding
The return based on NAV can be calculated using the formula for absolute return if the holding period is less than a year:
Absolute Return = ((Current NAV – Initial NAV) / Initial NAV) × 100
For periods longer than a year, the Compound Annual Growth Rate (CAGR) is used:
CAGR = (((Ending Value / Beginning Value)^(1 / Number of Years)) – 1) × 100
Yield to Maturity (YTM)
For an estimate of future returns, you can use the YTM, which is the total return anticipated on a bond if the bond is held until it matures. The formula for calculating expected 1-year returns using YTM is:
Expected 1 Year Returns = YTM + (Interest Rate Change × Modified Duration) – Expense Ratio
Indexation Benefit
For long-term investments, indexation benefits can be used to adjust the purchase price for inflation, which can reduce the capital gains tax liability. The formula for indexation is:
Indexed Purchase Price = Original Purchase Price × CII of the Sale Year / CII of the Purchase Year
where CII stands for Cost Inflation Index.
Note: By combining these calculations, you can arrive at the total returns from a debt mutual fund investment. It’s important to note that these calculations provide an estimate and actual returns can vary based on market conditions and the fund’s performance.
Who Should Invest in Debt Mutual Funds?
Investing in debt mutual funds is suitable for investors whose investment thesis aligns with the below-mentioned persona –
- Conservative Investors: Those who prioritise capital preservation over high returns and prefer stable income from their investments.
- Income Seekers: Investors who need regular income to meet their expenses, such as retirees.
- Risk-Averse Investors: Individuals who prefer avoiding the volatility of equity markets and are looking for safer investment avenues.
- Short to Medium-Term Goal Planners: Investors with financial goals that are 1 to 5 ys away, such as saving for a car, a wedding, or a down payment on a house.
- Portfolio Diversifiers: Investors looking to balance their investment portfolio with a mix of equity and debt to manage risk effectively.
Tax Benefits on Debt Mutual Funds in India
| Taxation Type | Condition | Taxation Rate | After 1st April 2023 |
| Short-Term Capital Gain (STCG) | If sold before 3 yrs from the investment date | Added to income and taxed as per income tax slab | Applicable |
| Long-Term Capital Gain (LTCG) | If sold 3 yrs from the purchase date | 20% with indexation benefits and 10% without indexation benefits | Not applicable; gains added to taxable income and taxed at slab rate |
Indexation benefit is applied to your investment amount to tax your returns fairly, which factors in inflation. For example, if your fund generates a 10% return over 3-yr and the inflation in that period is 6%, you pay 20% tax on the difference between the return and inflation, i.e., 10-6 = 4%. Now the total tax is 4*20% = 0.8%, where you’ll be taxed for 10-0.8= 9.2% instead of 10% returns.*
Potential Risks Associated with Debt Mutual Funds
While debt mutual funds are considered safer than equity funds, they are not entirely risk-free. The main risks associated with debt funds include:
- Interest Rate Risk: The risk of bond prices falling due to rising interest rates.
- Credit Risk: The risk of default by the issuer of the bond, leading to potential losses.
- Liquidity Risk: The risk associated with selling a security without significantly impacting its price.
The returns from debt funds are generally more predictable and less volatile than equity funds. However, the returns are influenced by interest rate movements, the credit quality of the portfolio, and the fund’s investment strategy.
5 Things to Consider Before Investing in Debt Mutual Funds
When considering investing in debt funds in India, here are five key factors to keep in mind:
- Credit Quality: Assess the average credit quality of the debt fund’s portfolio to ensure it aligns with your risk tolerance. Higher credit ratings typically indicate lower risk but also lower returns, while lower-rated instruments may offer higher yields but come with an increased risk of default.
- Portfolio Diversification: Ensure the fund’s portfolio is well-diversified to mitigate risks. Avoid funds with excessive exposure to a single issuer or group of companies, as this can lead to concentration risk and potentially significant losses in case of default.
- Interest Rate Risk: Consider the fund’s modified duration, which indicates its sensitivity to interest rate changes. Funds with longer durations are more vulnerable to interest rate fluctuations, which can impact the fund’s net asset value (NAV).
- Expense Ratio: Since debt funds generally offer modest returns, the expense ratio becomes a crucial factor. A lower expense ratio means higher net returns for the investor, making it an important consideration when choosing a debt fund.
- Investment Horizon and Maturity Profile: Match the fund’s duration profile with your investment horizon. Short-term funds are suitable for investment horizons of up to one year, while medium to long-term funds are better for longer investment periods. This alignment can help manage interest rate risk and ensure liquidity as per your needs.
Conclusion
Debt mutual funds offer a diversified investment option for those looking to earn stable returns with lower risk. By understanding the different types of debt funds, their investment strategies, and associated risks, investors can make informed decisions that align with their financial goals and risk tolerance.
FAQs
In India, debt mutual funds work by pooling money from investors and investing it in a diversified portfolio of debt securities. The fund manager selects securities based on credit quality, duration, and interest rate outlook to generate income through interest payments and capital gains. The performance of these funds is influenced by changes in interest rates, the creditworthiness of issuers, and the overall economic environment.
Choosing between Fixed Deposits (FDs) and Debt Mutual Funds in India depends on individual financial goals, risk tolerance, and investment horizon. FDs offer guaranteed returns and capital safety, making them suitable for conservative investors prioritising security over returns. They are less risky but offer lower returns, especially in a low-interest-rate environment. On the other hand, Debt Mutual Funds can offer higher returns by investing in a variety of debt instruments, including government and corporate bonds. They carry market-related risks such as interest rate and credit risk but offer better tax efficiency on long-term gains and flexibility in terms of investment and withdrawal options.
