10 Debt Funds That Gave Better Returns Than FDs

India has a growing economy, but it's still not very developed. That means there's not as much money in circulation as you might expect. Luckily, there are a few ways to get your hands on some extra cash without having to spend any of your own:

Debt funds are deposits that banks make with other banks to lend out their money. The most common type of debt fund is an investment in government bonds—these are investments in bonds issued by the government of India. They're usually issued at lower interest rates than other kinds of bonds because they're guaranteed by the government itself.

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.

Another type of deposit that can help you earn interest is a fixed deposit with a bank. This kind of deposit gives you access to funds for a set amount of time, but only if you keep it untouched for that period of time. If you want to take money out before then, or if something happens and you need the funds earlier than expected or at all, the bank will charge fees based on how long ago you took out your loan from them. 

List of 10 Debt Funds That Gave Better Returns Than FDs

Factors To Consider Before Investing in Debt Funds

Before investing in debt funds, you should consider the following-

• Expense Ratio

The expense ratio is a cost that funds charge to their investors. Usually, it's expressed in terms of the percentage of fund assets but can also be expressed as a fixed amount per year. The higher the expense ratio, the higher the cost per unit of return for a given investment.

• Maturity and Duration

A debt fund is an investment vehicle that invests directly in debt securities and loans. These securities include bonds, corporate notes and bonds, commercial paper, treasury bills, and municipal bonds. All of these securities have maturities ranging from one year to ten years or more depending on when they were issued by a government or corporation.

• Yield to Maturity (YTM) 

Yield to maturity is an important factor when deciding whether or not to invest in debt funds as it affects both how much interest will be paid out by your investment each year and how quickly your investment will grow over time if it's successful at outperforming other investments like stocks or real estate properties (which are typically riskier than bonds because they can fluctuate wildly in value).

• Credit Risk

Credit risk is the risk that borrowers will not repay their loans on time. This can be reduced by using a credit rating system and by investing in bonds from companies that are known for their good credit ratings. However, there is no guarantee that the investors will get back their money if they invest in these bonds.

• Interest Rates 

Interest rates will depend on many factors, including the company's credit rating, its investment strategy, and its financial condition. The higher the interest rate charged by a company, the less likely it is to pay back its debts because it has less financial capacity to do so.

Top Debt Funds Better Than FDs: Overview

1) Aditya Birla Sun Life Medium Term Fund

This is a Credit Opportunities type Debt Mutual Fund launched on March 22, 2009. It is a debt fund with low risk and has given a return of 9.07 % since its launch. Here are the key features of Aditya Birla Sun Life Medium Term Plan : 

• This fund has been rated as a 5-star fund by Groww. 
• Has consistently outperformed its benchmark Crisil AA ST Bond Index since its launch. 
• The top portfolio holdings of the fund include Piramal Finance Ltd., SP Imperial Star Pvt. Ltd., Sprit Textiles Pvt Ltd., Wadhawan Global Capital Pvt Ltd., RKN Retail Pvt. Ltd., 10 Prestige Estates Projects Ltd. etc. 

2) ICICI Prudential Long Term Plan

This is a Dynamic bond type Debt Mutual Fund launched on January 20, 2010. It is a debt fund with moderately low risk and has given a return of 9.78 % since its launch. Here are the key features of the ICICI Prudential Long Term Plan: 

• This fund has been rated as a 5-star fund by Groww.
• The age is nearly 8 years. So its performance can be easily judged. 
• Has consistently outperformed its benchmark BSE S&P 100 and NIFTY 50 since its launch. 
• The top portfolio holdings of the fund include 7.17 GOI Jan 8, 2028,  7.88 GOI Mar 19, 2030, CBLO (CCIL), Yes Bank Ltd., 7.88 GOI Mar 19, 2030, etc. 

3) Franklin India Ultra Short Bond Fund 

This is an Ultra Short Term Fund type Debt Mutual Fund launched on December 18, 2007. It is found with very low risk and has given a return of 8.89 % since its launch. Here are the key features of Franklin India Ultra Short Bond Fund : 

• This fund has been rated as a 5-star fund by Groww.
• The age is nearly 10 years. So its performance can be easily judged.
• Has consistently outperformed its benchmark Crisil Liquid since its launch.
• The top portfolio holdings of the fund include Viom Networks Ltd.,  8.4 Edelweiss Commodities Services Ltd., AU Financiers India Pvt Ltd, Tata Power Renewable Energy Ltd., 12.25 DLF Ltd. Aug 11, 2017, etc. 
• The holdings are balanced across various sectors with maximum weightage given to Financial Services.

4) ICICI Prudential Short Term Fund

ICICI Prudential Short Term Fund Growth is a Debt Mutual Fund Scheme launched by ICICI Prudential Mutual Fund. This scheme was made available to investors on 12 Oct 1993. Manish Banthia is the Current Fund Manager of ICICI Prudential Short Term Fund Growth fund. The scheme seeks to generate income through investments in a range of debt and money market instruments while maintaining the optimum balance of yield, safety, and liquidity.

• The scheme seeks to generate income through investments in a range of debt and money market instruments while maintaining the optimum balance of yield, safety, and liquidity.
• It has consistently outperformed its benchmark Crisil Composite Bond since its launch.
• The holdings are balanced across various sectors.

5) Axis Income Fund

This is an Income type Debt Mutual Fund launched on March 30, 2012. It is a debt fund with moderately low risk and has given a return of 10.29 % since its launch. Here are the key features of Axis Income Fund : 

• This fund has been rated as a 4-star fund by Groww. 
• Has consistently outperformed its benchmark Crisil Composite Bond since its launch.

Conclusion

Debt funds clearly outscore bank FDs in terms of returns, liquidity, and tax treatment. Bank FDs outscore debt mutual funds only in terms of capital protection and certainty of returns.

However, if debt funds are selected wisely, even these risks can be mitigated to a large extent. For investment tenure of fewer than 3 years, both FDs and debt funds are taxed in the same way and there is not much difference you can see in terms of returns on your investments. 

But for your regular allocation to debt, which will remain for more than 3 years, debt funds make a better choice thanks to their consistent long-term track record, tax efficiency, and flexibility to shift.

Ultimately, you should weigh your decision on your risk appetite, time horizon, and investment goals. But remember, don’t invest in debt funds without doing your homework. Performance track record along with scheme-specific attributes, portfolio credit quality, fund manager track record, and expense ratios really do matter for investing in debt mutual funds.

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Research Analyst - Bavadharini KS