Debt funds are mutual funds that invest in money market instruments like bonds, treasury bills, etc.

Unlike equity mutual funds, they are associated with a lot less risk. Their returns are also much more stable when compared to equity funds.

When investing for a short period of time, like less than 2 years, debt funds make very good investments.

Best Debt Funds - 2019: At a Glance
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
Axis Liquid Direct Fund -Growth 7.54% 7.19% 7.71% 0.11% NA Debt
(Liquid)
Low
Indiabulls Liquid Direct Fund-Growth 7.43% 7.21% 7.78% 0.1% NA Debt
(Liquid)
Low
Franklin India Low Duration Direct Plan- Growth 8.8% 8.92% 9.38% 0.51% NA Debt
(Low Duration)
Moderate
ICICI Prudential All Seasons Bond Fund Direct Plan-Growth 11.24% 9.46% 10.78% 0.63% NA Debt
(Dynamic)
Moderate
Kotak Money Market Scheme Direct-Growth 8.59% 7.49% 7.91% 0.16% NA Debt
(Money Market)
Low
Franklin India Ultra Short Bond Fund Super Institutional Direct-Growth 9.82% 8.97% 9.32% 0.44% NA Debt
(Ultra Short Duration)
Moderate
HDFC Short Term Debt Fund Direct Plan-Growth 9.46% 7.94% 8.59% 0.25% NA Debt
(Short Duration)
Moderately Low
Aditya Birla Sun Life Corporate Bond Fund Direct-Growth 10.4% 8.25% 8.93% 0.27% NA Debt
(Corporate Bond)
Moderately Low

Best Debt Funds in India – Details

1.Axis Liquid Fund

Key Details

Rating by Groww 5 star
AUM (Fund Size) ₹28,010 Cr
Minimum SIP ₹ Not supported
Minimum lumpsum ₹500
Age of the fund 10 years
Expense Ratio 0.11%
Type Open-Ended

This fund is a liquid fund, as the name suggests. Liquid funds are ideal for investing anywhere from a few days to a few months.

The returns they give is better than a savings bank account. This is exactly why liquid funds are a good alternative to keeping money in the savings bank account.

Axis Liquid fund is one of the top performing liquid funds that has given returns of around 8% over the last 5 years – which is a good return.

Even in the last year, the rate of return is much higher than what you’d get from a savings account.

2.Indiabulls Liquid Fund

Key Detials

Rating by Groww 3 star
AUM (Fund Size)  ₹5,045 Cr
Minimum SIP ₹500
Minimum lumpsum ₹500
Age of the fund 8 years
Expense Ratio 0.10%
Type Open-Ended

The reason why liquid funds are considered a good alternative to keeping money in the savings account is that redeeming money from a liquid fund is a very fast procedure.

Unlike other other types of funds, redeeming money from a liquid fund takes only about a day or two.

Indiabulls Liquid Fund is another good liquid fund on this list. It has given a return of 8.25% over the last 5 years and 6.71% over the last one year.

3.Franklin India Low Duration Fund 

It is one the most reputed funds in the debt category and has very strong fundamentals.

Key Details

Rating by Groww 5 star
AUM (Fund Size) ₹6,875 Cr
Minimum SIP ₹500
Minimum lumpsum ₹10,000
Age of the fund 6 years
Expense Ratio 0.40%
Type Open-ended

Franklin India Low Duration Fund is an ultra short term fund.

It has given a very high return of 9.49% over the last 5 years and 8.20% in the last 1 year.

It is ideal for investing for a period of a few months to a year.

4.ICICI Prudential Long Term Plan

Key Details

Rating by Groww 5 star
AUM (Fund Size) ₹28,010 Cr
Minimum SIP ₹ Not supported
Minimum lumpsum ₹500
Age of the fund 26 years
Expense Ratio 0.60%
Type Open-Ended

This fund is a dynamic fund – which means it is a fund that switches aggressively between short term and long term investments.

This allows the fund to leverage differences between the two types of investments.

ICICI Prudential Long Term Investment Plan has given a return of 4.43% in the last 1 year and an incredible 11.24% over the last 5 years.

Bonus List

5. Kotak Money Market Scheme

Key Details

Rating by Groww 3 star
AUM (Fund Size) ₹6,736 Cr
Minimum SIP ₹ Not supported
Minimum lumpsum ₹5000
Age of the fund 21 years
Expense Ratio 0.16%
Type Open-ended

6.Franklin India Ultra Short Bond Fund

Key Details

Rating by Groww 5 star
AUM (Fund Size) ₹16,712 Cr
Minimum SIP ₹1000
Minimum lumpsum ₹5000
Age of the fund 21 years
Expense Ratio 0.16%
Type Open-ended

7.HDFC Short Term Debt Fund

Key Details

Rating by Groww 4 star
AUM (Fund Size) ₹7,316 Cr
Minimum SIP ₹500
Minimum lumpsum ₹5000
Age of the fund 19 years
Expense Ratio 0.25%
Type Open-ended

8.Aditya Birla Sun Life Corporate Bond Fund 

Key Details

Rating by Groww 4 star
AUM (Fund Size) ₹15,134 Cr
Minimum SIP ₹100
Minimum lumpsum ₹100
Age of the fund 25 years
Expense Ratio 0.27%
Type Open-ended

What are Debt Mutual Funds?

Debt mutual funds are mutual funds that invest mainly in a combination of debt or fixed income securities such as, government securities, treasury bills, money market instruments, corporate bonds and other debt securities of different time periods as per the convenience of the investor.

In general, debt securities come with a fixed maturity date & pay a fixed rate of interest.

Credit ratings are also assigned to debt securities.

These credit ratings help the investors to understand the ability of the issuer of the securities or bonds to repay their debt, over a certain time horizon.

There are different rating organizations such as CRISIL, CARE, FITCH, Brickwork, and ICRA that are responsible for issuing the rating to the securities.

Fund houses use the ratings to evaluate the ability of the issuer of the security to repay their debts or the creditworthiness of issuers of debt securities.

So a simpler way to understand debt funds will be to consider them as a way of passing through the interest income that they receive from the bonds they invest in.

But that is not as simple as it looks and there are still some complexities involved it.

Debt Mutual Funds, unlike the FDs that individuals invest in, makes investments in bonds or securities that are tradable, just like shares in stock markets are tradable.

Advantages

1.Returns

Debt funds can provide an investor with a return of around 7-8% on an average.

Whereas a bank recurring deposit would provide a return of 5-7% to the investor.

Considering that the risk factor of both the type of investment are similar, a higher return provided by debt funds is more preferable than the investment in bank recurring deposits.

2. Rupee Cost Averaging

When the investors invest regularly over a period of time irrespective of the conditions the market is in, what happens is they get more units when the market conditions are not good and less units when the market is booming.

In the process what happens is that the purchase cost of your mutual fund units is averaged out.

3. Liquidity

Debt funds will provide you with the option of more liquidity as compared to bank recurring deposits.As discussed earlier recurring deposit is liquid but premature withdrawal would incur a penalty with a fixed rate.

Money can be withdrawn from SIP in debt funds without incurring a penalty on it and the SIP can be closed.

In terms of liquidity, a SIP in debt funds is a better option when compared to RD.

4. Lower Taxes

Up to 3 years, the taxation on debt funds and RD is similar.

However, after 3 years from investment, the tax on debt funds is significantly lower than the tax on RD.

After 3 years from investment, the tax on debt funds is 10% without indexation plus 3% cess.

At the same time, RD keep attracting the same rate as before 3 years from investment – which depends on your income tax bracket.

Happy investing!

Disclaimer: the views expressed here are those of the author. Mutual funds are subject to market risks. Please read the offer document before investing.

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