Open-ended mutual fund schemes that predominantly invest in fixed-income debt securities are known as debt funds. The underlying assets comprises treasury bills, government bonds, certificate of deposits, debentures, corporate bonds and various other money-market instruments.
Debt funds are one of the safest investment instruments available to investors, who wish to earn optimal returns on their investment, without betting on risky avenues. Also, the returns are quite stable, as opposed to returns from equity funds which are highly volatile.
To know more about debt funds, visit: What are Debt Funds?
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Top 5 Debt Funds to Invest
Here is a list of top 5 Debt Funds you can invest in 2020 to generate quality returns:
| Fund Name | AUM (cr.) | 3 Year Returns | Link |
| Nippon India Gilt Securities Fund | ₹ 1,250 | 9.69% | Invest Now |
| SBI Magnum Medium Duration Fund | ₹ 3,192 | 9.13% | Invest Now |
| Kotak Credit Risk Fund | ₹ 2,662 | 6.96% | Invest Now |
| ICICI Prudential Ultra Short Term Fund | ₹ 5,426 | 7.98% | Invest Now |
| Franklin India Liquid Fund | ₹ 3,582 | 6.99% | Invest Now |
{Note: Funds have been ranked on the basis of 5 year returns}
{Data as on May 12, 2020; Source: Value Research}
1. Nippon India Gilt Securities Fund
The fund primarily invests in debt securities issued by the Central and State governments to generate optimal risk-free returns.
| Returns | 1 – Year Returns | 3 – Year Returns | 5 – Year Returns |
| Fund | 9.69% | 10.17% | 9.52% |
| Benchmark | 9.79% | 9.77% | 9.08% |
{Data as on May 12, 2020; Source: Value Research}
- This is one of the safest debt instruments in terms of credit risks, as it is highly unlikely for a government to default on the payment of interest and principal of issued bonds.
- Investors who wish to invest with the motive of long term wealth creation can consider investing in this fund.
2. SBI Magnum Medium Duration
It is a debt fund that predominantly invests in debt securities to generate decent returns in the medium term investment horizon, coupled with a moderate level of liquidity. The average maturity period of the fund is 3-4 years.
| Returns | 1 – Year Returns | 3 – Year Returns | 5 – Year Returns |
| Fund | 9.13% | 10.09% | 10.13% |
| Benchmark | 7.13% | 7.35% | 7.42% |
{Data as on May 12, 2020; Source: Value Research}
- The fund invests in short term debt securities to ensure regular accrual payment, and medium duration securities for substantial capital appreciation.
- Well-diversified credit risk and suitable exporate to medium term securities makes it one of the best medium duration debt funds to invest in 2020.
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3. Kotak Credit Risk Fund
An open-ended debt scheme that majorly invests in debt and money market instruments to deliver significant returns by taking a little high credit risk.
| Returns | 1 – Year Returns | 3 – Year Returns | 5 – Year Returns |
| Fund | 6.96% | 8.61% | 8.77% |
| Benchmark | 4.22% | 4.44% | 4.75% |
{Data as on May 12, 2020; Source: Value Research}
- The fund follows an investment strategy that focuses on selling securities with low-yield, and buying securities with high-yield.
- This fund is apt for investors who have a moderate risk appetite as the underlying securities carry a little high credit risk.
4. ICICI Prudential Ultra Short Term Fund
It is an open-ended debt scheme that predominantly invests in instruments with the maturity period ranging from 3 months to 6 months. The scheme has limited, if not zero, allocation to government securities so as to reduce interest rate volatility which might affect the fund returns.
| Returns | 1 – Year Returns | 3 – Year Returns | 5 – Year Returns |
| Fund | 7.98% | 8.97% | 8.89% |
| Benchmark | 4.22% | 4.44% | 4.75% |
{Data as on May 12, 2020; Source: Value Research}
- The fund follows a meticulous selection procedure to pick securities that have a high credit rating, and has the ability to enhance yield and effectively mitigate associated risks. The objective is to deliver quality returns across all interest rate cycles.
- The investment strategy followed by the fund focuses on holding the underlying corporate bonds till its maturity and generates regular accrual income from the same.
5. Franklin India Liquid Fund
It is a debt fund that primarily invests in debt instruments with a maximum maturity of 90 days, with the objective of generating optimal returns coupled with high liquidity..
| Returns | 1 – Year Returns | 3 – Year Returns | 5 – Year Returns |
| Fund | 6.99% | 7.30% | 7.88% |
| Benchmark | 4.22% | 4.44% | 4.75% |
{Data as on May 12, 2020; Source: Value Research}
- This fund is suitable for investors who want to invest their emergency/surplus funds with the motive of earning better returns on them as compared to those provided by savings bank accounts.
- Since the fund invests in a mix of highly rated short term debt securities and money market instruments, the overall risk exposure of the portfolio is considerably low.
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Advantages of Investing in Debt Funds
- As debt funds primarily invest in securities that yield fixed-interest, returns from them are guaranteed. However, there is a minuscule possibility of a debt fund not performing upto the mark, this happens when the invested securities have low credit rating, or the interest rate movement is negative.
- Overnight Funds or Liquid Funds are categorised under debt funds which have delivered optimal returns in the short run over the years. These funds are highly liquid and are a perfect safe haven for idle money in hand. One can redeem the units as per his/her convenience.
- When compared to returns delivered by traditional savings methods such as Savings Accounts or Bank Fixed Deposits, debt funds have always fared well. While savings accounts have delivered around 4-5% annual returns over the years, liquid funds have delivered returns at the average rate of 7%. Also, instant redemption facilities in case of liquid funds make them a better alternative to savings accounts.
- When it comes to investing, it is recommended to construct your investment portfolio as diverse as possible. A diversified portfolio is the first step to effective risk mitigation. It is recommended to invest in that debt fund which has appropriate allocation to various money market instruments, instead of concentrating on single debt security.
- Instead of individually selecting a debt security for investment, it is advisable to invest in a debt fund, where a professional fund manager formulates a portfolio of multiple securities, after proper analysis of market sentiment and interest rate movements.
How to invest?
There are two ways through which a person can invest in Debt Funds:
- Online
You can invest in Debt Funds online seamlessly through online platforms (such as Paisabazaar.com) or directly through the websites of the Asset Management Companies (AMCs), offering the fund.
- Offline
This conventional mode of investment requires an investor to fill a form and submit it at the nearby branch of the fund house, or invest through a broker.
To know more about the investment procedure for mutual funds, visit: How to invest in Mutual Funds?
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FAQs
Q. What are the best short term debt funds?
A. Here is a list of best short term debt funds you can consider investing :
ICICI Prudential Savings Fund
IDFC Bond Short Term Fund
Axis Short Term Fund
Kotak Low Duration Fund
HDFC Short Term Debt Fund
Q. Is it safe to invest in debt funds?
A. Yes. Debt Funds are one of the safest investment avenues as they’ve historically delivered fixed returns, without putting the invested capital at high risk.
Q. Can debt funds give negative returns?
A. Generally, returns from debt funds are always positive. However, when the interest rate rises, long term debt may deliver negative returns as the value of underlying bonds purchased at low interest rate falls in the secondary market when the interest rate rises.
Q. What are different types of debt funds?
A. Here is a list of type of debt funds offered to investors, as categorised by SEBI:
Overnight Fund
Liquid Fund
Ultra Short Duration Fund
Low Duration Fund
Money Market Fund
Short Duration Fund
Medium Duration Fund
Medium to Long Duration Fund
Long Duration Fund
Dynamic Bond Fund
Credit Risk Fund
Banking and PSU Fund
Gilt Fund
Gilt Fund With 10 Year Constant duration
Floater Fund
Q. Why are debt funds better than FD?
A. Debt funds fare better than Bank Fixed Deposits on two fronts, first, unlike FDs, debt funds don’t have any lock-in period. Second, as per the past trends, debt funds have delivered better returns than fixed deposits.