Investing in the best debt funds can allow you to grow your money with minimal risk exposure. If not grow, you can at the very least take advantage of the capital protection low-risk debt mutual funds offer

One mistake people often make is that of associating mutual funds with the equity markets. Many people who in the past have tried to informally invest in the equity markets and lost money view all mutual funds with scepticism.

In reality, mutual funds come in various varieties. And even the riskiest of mutual funds are less risky than investing in the equity markets without any knowledge or skill.

Mutual funds which invest in the equity markets are called equity mutual funds. Debt mutual funds do not primarily invest in the equity markets and are therefore not directly exposed to the volatility of the same.

What Is a Debt Mutual Fund?

A debt mutual fund is a type of mutual fund that invests in fixed income securities. These securities largely include treasury bills, government securities, corporate bonds, money market instruments, and other debt securities.

Like every mutual fund, they do not offer fixed returns. However, they are less riskier than equity mutual funds while offering lower returns. They also don’t experience the kind of volatility experienced by equity mutual funds.

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Best Debt Funds to Invest in 2017

ICICI Prudential Gilt Fund

The risk-adjusted returns of this fund are higher than category. The exit load is also zero. Besides, this fund is nearly 15 years old which gives it a good reputation.

Risk Level Moderately Low
Minimum SIP Amount ₹1000
1 Year Returns 8.31%
3 Year Returns 12.41%
5 Year Returns 10.36%

SBI Magnum Gilt Long Term

This fund too is over 10 years old. It is slightly risky when compared to the fund above. This fund does not support online SIP though.

Risk Level Moderately Low
Minimum SIP Amount Not supported
1 Year Returns 9.62%
3 Year Returns 12.80%
5 Year Returns 11.59%

ICICI Prudential Income Opportunities Fund

Risk-adjusted returns are higher when compared to the category. The expense ratio is on the lower side too. The one drawback of this fund is that its risk is higher than the benchmark.

Risk Level Low
Minimum SIP Amount ₹1000
1 Year Returns 7.52%
3 Year Returns 10.19%
5 Year Returns 9.23%

Axis Income Fund

Compared to the funds above, this fund is a bit young. Launched in 2012, this fund is just about 5 years old. However, in that period, it has managed to give consistent and good results.

Risk Level Low
Minimum SIP Amount ₹1000
1 Year Returns 8.62%
3 Year Returns 10.43%
5 Year Returns 9.31%

SBI Magnum Monthly Income Plan

This scheme aims to provide a regular income to investors through an actively managed portfolio of debt, equity, and money market instruments. This fund too is more than 10 years old and has performed well over the years. The risk involved in this fund is higher than the benchmark. This fund does not support online SIP.

Risk Level Moderately Low
Minimum SIP Amount Not supported
1 Year Returns 9.37%
3 Year Returns 11.58%
5 Year Returns 10.86%

Reliance Monthly Income Plan

This fund allows for SIP to be started at ₹500 as opposed the ones mentioned above. Like the others on this list, this fund also prioritizes capital protection more than it does capital growth. The expense ratio of this fund is a bit on the higher side.

This fund too is more than 10 years old. The risk involved in this fund is on the higher side too.

Risk Level Moderatly Low
Minimum SIP Amount ₹500
1 Year Returns 9.42%
3 Year Returns 10.26%
5 Year Returns 10.62%

SBI Magnum Gilt Short Term Plan

This fund allows for SIP to be started at ₹500 as opposed the ones mentioned above. Like the others on this list, this fund also prioritizes capital protection more than it does capital growth. The expense ratio of this fund is a bit on the higher side.

This fund too is more than 10 years old. The risk involved in this fund is on the higher side too.

Risk Level Low
Minimum SIP Amount Not supported
1 Year Returns 9.42%
3 Year Returns 10.26%
5 Year Returns 10.62%

HDFC Short Term Opportunities Fund

This fund has zero exit load. This feature alone makes this debt fund very attractive for those looking to park their money for short durations.

This fund is more than 5 years old which gives it enough time to display a good track record. The risk is a bit on the higher side though.

Another noteworthy fact about this fund is that it has an AUM of ₹10,394 crore which is a very high amount.

Risk Level Very Low
Minimum SIP Amount ₹1000
1 Year Returns 9.42%
3 Year Returns 10.26%
5 Year Returns 10.62%

Franklin India Low Duration Fund

Frankin India Low Duration Fund has a low expense ratio coupled with consistent performance over the years. Even the minimum SIP amount is a low ₹500.

This fund has performed well and returned very consistent returns over the years.

The risk of this fund is higher than the benchmark.

Risk Level Very Low
Minimum SIP Amount ₹500
1 Year Returns 9.23%
3 Year Returns 9.64%
5 Year Returns 9.65%

ICICI Prudential Ultra Short Term Plan

ICICI Prudential Ultra Short Term Plan is another fund that has an exit load of zero. Even the expense ratio is very low at 0.37%.

This fund has a risk rating higher than the benchmark. At the same time, this fund is more than 5 years old. This fund also has a relatively high AUM of ₹10,048 crores.

It has a 4-star rating on our website, groww.in.

Risk Level Low
Minimum SIP Amount ₹1000
1 Year Returns 7.75%
3 Year Returns 8.93%
5 Year Returns 8.82%

Principal Cash Management Fund

Principal Cash Management Fund is one of the youngest funds on this list. It is a little more than 3 years old. At the same time, its risk is lower than the benchmark. Its expense ratio is very low at 0.22%.

Another added bonus is that this fund has an exit load of zero.

Its AUM is under ₹1000 crores which is a bit on the lower side. The 5 year returns are also relatively low.

Also, this fund has a relatively high minimum SIP amount – ₹2000.

Risk Level Very Low
Minimum SIP Amount ₹2000
1 Year Returns 6.82%
3 Year Returns 7.81%
5 Year Returns 8.33%

Kotak Floater

This fund’s risk is lower than the benchmark. Also, it has an incredibly low expense ratio of just 0.15%.

At ₹12,594 crores, the AUM of this fund is pretty big. This fund also does not have any exit load.

The 10-year returns of this fund are a bit on the lower side.

Risk Level Very Low
Minimum SIP Amount ₹1000
1 Year Returns 6.78%
3 Year Returns 7.81%
5 Year Returns 8.36%

Franklin India Dynamic Accrual Fund

Franklin India Dynamic Accrual Fund is another fund that accepts a low SIP amount of ₹500. It has a relatively high expense ratio of 1.77%

It is a 5-star rated dynamic bond fund that is more than 20 years old.

Over the very long period, this fund has been in existence, it has performed exceptionally well.

It has a healthy AUM of ₹2636 crores too.

Risk Level Low
Minimum SIP Amount ₹500
1 Year Returns 9.92%
3 Year Returns 10.75%
5 Year Returns 9.33%

ICICI Prudential Long Term Plan

At about 7 years old, ICICI Prudential Long Term Plan has a healthy number of years to prove its worth.

It has a low expense ratio and risk-adjusted returns are higher than the category.

Its AUM is good to at ₹2480 crores.

The risk level is higher than the benchmark.

Risk Level Moderately Low
Minimum SIP Amount ₹1000
1 Year Returns 9.65%
3 Year Returns 11.99%
5 Year Returns 11.79%

Types of Debt Mutual Funds

Gilt Fund

If you invest in gilt funds for more than a year, it is basically betting against the movement of interest rates. On the other hand, if you plan on investing for less than a year, gilt funds might be the wrong place.

Gilt funds are considered very low risk. The returns in the case of gilt funds do not suffer from major fluctuations.

If you’re investing in gilt funds, an ideal time period for investing would be more than a year and less than 3 years.

Some notable gilt funds are ICICI Prudential Gilt Fund, SBI Magnum Gilt Long Term Plan, and UTI Gilt Advantage Fund – Long Term Plan.

Income Funds

Income funds invest in fixed income securities like government securities, bonds, debentures, fixed deposits and so on.

Income funds prioritize capital protection over capital growth. Hence, they aim for a reasonable capital appreciation only.

In income funds, the fund manager invests in securities with a higher rating and those that have a proven track record of performance in the past.

In terms of risk, income funds are considered to be of higher risk than gilt funds.

It is recommended that people invest in income funds for a duration greater than a year and less than 3 years. Those investing for less than a year could experience short-term capital loss.

ICICI Prudential Income Opportunities Fund, Axis Income Fund, and Sundaram Flexible Fund are some noteworthy funds in this category.

MIP (Monthly Income Fund)

MIP funds are more popular with people who desire to not expose themselves to capital losses but still want their money to grow.

MIP funds invest about 10-20% of their funds in equity. The remainder is invested in fixed income securities.

The aim here is to beat inflation. As long as the fund manages to beat the inflation rate, the fund managers refrain from taking greater risks.

Many speak highly of MIP as an option that benefits you when the markets do well and protect you when the markets perform poorly. This is slightly flawed. Due to the low percentage of funds invested in equity, the benefits received are also marginal no matter how well the markets perform.

Till about 2 years ago, these funds used to be taxed as equity mutual funds. That meant that if you redeemed after a year from investment, you’d have to pay no tax. However, now the tax rates applicable are similar to the tax rates applicable to other debt funds. Read about the tax of mutual funds.

Due to this reason alone, debt funds have become a bad investment option.

Some of the best rated monthly income plans are SBI Magnum Monthly Income Plan, Reliance Monthly Income Plan, and HDFC Monthly Income Plan among others.

Short-term Funds

Short-term funds are perfect for people with a low appetite for risk. The ideal period for investment in these funds is between a year and 3 years. You can expect a return averaging in the range of 5-9%.

Staying invested a fund of this category for more than 3 years is not advised and can also be considered a risky proposition. Investing for less than a year too will have you seeing volatility which might lead to selling mutual fund units at a loss.

Some short-term funds with the best ratings are SBI Magnum Gilt Short-term Plan, HDFC Short-term Opportunities Fund, and Aditya Birla Sun Life Short Term Fund. 

Ultra Short-term Funds

Ultra short-term funds have gained great popularity of late. Ultra short-term funds are very similar to liquid funds. However, they are different in one key aspect: they can invest in securities maturing beyond 91 days. Liquid funds cannot invest in securities maturing after 91 days.

Ultra-short-term funds usually invest in securities that mature anywhere between a week to 18 months.

An ideal period to remain invested in ultra short-term funds would be 6 months to about a year.

Ultra short-term funds are also gaining popularity because of being an effective tool for STP or Systematic Transfer Plan.

People who have large amounts of money to invest in equity mutual funds refrain from investing in one go. They put the amount in an ultra short-term fund and transfer regularly from that fund to an equity mutual fund. This reduces their exposure to risk from the volatile movements of the equity markets. Read more here to understand STP better. 

Franklin India Low Duration Fund, ICICI Prudential Ultra Short Term Plan, and BOI AXA Treasury Advantage Fund are some ultra short-term funds with the highest ratings.

Liquid Funds

Liquid funds are called ‘liquid’ because of the short duration it takes for investments to be redeemed from the liquid funds. It takes only one day to redeem investments from a liquid fund.

For this reason alone, liquid funds are a very attractive alternative to keeping money in savings bank account.

Compared to other types of debt funds, this is riskier.

Liquid funds return an average ranging from 9-11%.

Some of the best rated liquid funds are Principal Cash Management Fund, Kotak Floater Short Term, and Indiabulls Liquid Fund.

Dynamic Bond Funds

Dynamic bond funds are debt funds that have one strong advantage over the others. The allocation of assets is not fixed. The allocation of the assets is decided by the fund manager.

In times when a certain type of security is performing poorly, the fund manager can change the allocation of the fund’s assets to securities that are performing better.

When investing in dynamic bond funds, it is advised to stay invested for more than 3 years. Dynamic bond funds are the high-risk, high-return funds in the debt mutual fund category.

Dynamic bond funds can give returns in excess of 10% which is very high for any kind of debt mutual fund.

Franklin India Dynamic Accrual Fund, ICICI Prudential Long Term Plan, and Aditya Birla Sun Life Treasury Optimizer are examples of good dynamic bond mutual funds.

debt mutual funds tax

Tax on Debt Mutual Funds

There is a lot of misconception about the tax on debt mutual funds. The tax rates applicable on debt mutual funds are not the same as tax applicable on equity mutual funds.

Unlike equity mutual funds where short-term stands for 1 year, short-term is defined as 3 years. Naturally, long-term investments are those that are held for more than 3 years.

In case of debt mutual funds, the tax applicable on short-term funds depends on individual tax slabs.

For long-term gains from debt mutual funds, the rate is 10% without indexation or 20% with indexation plus 3% cess.

Understand tax on mutual funds better. 

Happy investing!