One golden rule of investing is that your portfolio must always include fixed-income products, no matter what your age is or how interest rates are moving.

We often ignore debt funds, only because it gives lesser returns compared to equities.

However, debt funds are an important instrument of investment and as an investor one should figure out the factors that make these funds relevant to invest.

Debt mutual funds invest mostly in debt instruments, like corporate bonds, government bonds, bonds issued by banks etc.

These mutual funds are best for investors who are risk averse.

Why do debt funds remain stable during market lows?

Debt funds, which invest in a range of debt and fixed-income securities of different maturities and credit quality, protect you from equity market volatility and offer decent returns.

The domestic market fell big time in the last one month.

Still, the returns from debt mutual fund are stable.

The reason is, yields on bonds, both government and corporate, are high, thanks to the Reserve Bank of India’s (RBI’s) 13 consecutive rate increases since March 2010.

The yield on 10-year government bonds maturing in 2021 with 7.8% coupon rate, or interest rate, is close to 8.9%, while the yield on three-month treasury bills (T-bills) is 8.7%.

One-year certificate of deposit (CDs), issued by commercial banks, are giving 9.5-9.7%.

But the IL&FS episode has important lessons for debt investors.

If you are keen on higher return from your debt funds, keep in mind that it will come with a certain degree of risk.

Instead of aiming at high returns, investors should simply look at getting optimal post-tax returns in debt and treat debt not as a wealth creator, but as a stable source of income.

The best 5 debt funds to invest in

Here is the list of the best mutual fund in debt oriented schemes:

1. ICICI Prudential Liquid Fund – Direct – Growth

This is the best liquid fund and invests in debt and money market securities with maturity of up to 91 days only.

Key information

Launch Date 1 January 2013
NAV (11 Oct 2018) ₹267
Plan Type Direct
Rating by Groww 5 Star
AUM (Fund Size) ₹47,395 Cr
Riskometer Moderately Low
Minimum SIP ₹500
Minimum SWP Not Supported
Performance w.r.t its Benchmark Has consistently outperformed its benchmark CRISIL Liquid since its launch.
Age of the fund 5 years old
Expense Ratio 0.15%
Exit Load NIL
Type  Open Ended

Returns per annum

ICICI Prudential Liquid Fund
Fund Name 1Y 3Y 5Y Category Risk
ICICI Prudential Liquid Fund - Direct - Growth 7.3% 7.28% 7.93% Debt
(Liquid)
Low

2. Franklin India Ultra Short Bond Fund – Direct – Growth

This fund invests in debt & money market instruments, such that the duration of the portfolio is between 3 – 6 months.

Key information

Launch Date 1 January 2013
NAV (11 Oct 2018) ₹25.1
Plan Type Direct
Rating by Groww 5 Star
AUM (Fund Size) ₹13,240 Cr
Riskometer Low
Minimum SIP ₹1,000
Minimum SWP ₹1,000
Performance w.r.t its Benchmark Has consistently outperformed its benchmark CRISIL Liquid since its launch.
Age of the fund 5 years old
Expense Ratio 0.34%
Exit Load NIL
Type  Open Ended

Returns per annum

Franklin India Ultra Short Bond Fund – Direct – Growth
Fund Name 1Y 3Y 5Y Category Risk
Franklin India Ultra Short Bond Fund - Direct - Growth 7.87% 8.81% 9.31% Debt
(Ultra Short Duration)
Moderate

3. Franklin India Low Duration Fund – Direct – Growth

This is the best low duration fund and invests in debt & money market instruments, such that the duration of the portfolio is between 6-12 months.

Key information

Launch Date 1 January 2013
NAV (11 Oct2018) ₹21.1
Plan Type Direct
Rating by Groww 5 Star
AUM (Fund Size) ₹5,908 Cr
Riskometer Moderately Low
Minimum SIP ₹500
Minimum SWP ₹1,000
Performance w.r.t its Benchmark Has consistently outperformed its benchmark CRISIL Short-Term Bond  since its launch.
Age of the fund 5 years old
Expense Ratio 0.45%
Exit Load If redeemed bet. 0 Months to 3 Months; Exit Load is 0.5%;
Type  Open Ended

Returns per annum

Franklin India Low Duration Fund
Fund Name 1Y 3Y 5Y Category Risk
Franklin India Low Duration Fund - Direct - Growth 7.65% 8.94% 9.54% Debt
(Low Duration )
Moderate

Also Read: Is Your Money Lying Idle in a Bank? Invest in These 5 Liquid Funds

4. L&T Money Market Fund – Direct – Growth

This fund invests in money market instruments that has a maturity of up to 1 year.

Key information

Launch Date 1 January 2013
NAV (11 Oct 2018) ₹18.2
Plan Type Direct
Rating by Groww 5 Star
AUM (Fund Size) ₹872 Cr
Riskometer Moderately Low
Minimum SIP ₹1,000
Minimum SWP ₹500
Performance w.r.t its Benchmark Has consistently outperformed its benchmark CRISIL Liquid since its launch.
Age of the fund 5 years old
Expense Ratio 0.28%
Exit Load NIL
Type  Open Ended

Returns per annum

L&T Money Market Fund
Fund Name 1Y 3Y 5Y Category Risk
L&T Money Market Fund - Direct - Growth 7.37% 8.46% 8.63% Debt
(Money Market)
Moderately Low

5. HDFC Short Term Debt Fund – Direct – Growth

This fund invests in debt & money market instruments such that the duration of the portfolio is between 1 – 3 years.

Key information

Launch Date 1 January 2013
NAV (11 Oct 2018) ₹19.9
Plan Type Direct
Rating by Groww 5 Star
AUM (Fund Size) ₹9,490 Cr
Riskometer Moderately Low
Minimum SIP ₹1,000
Minimum SWP NIL
Performance w.r.t its Benchmark Has consistently outperformed its benchmark CRISIL Short-Term Bond since its launch.
Age of the fund 5 years old
Expense Ratio 0.25%
Exit Load NIL
Type  Open Ended

Returns per annum

HDFC Short Term Debt Fund
Fund Name 1Y 3Y 5Y Category Risk
HDFC Short Term Debt Fund - Direct - Growth 5.92% 7.52% 8.59% Debt
(Short Duration)
Moderately Low

Advantages of having debt mutual fund in your portfolio

Here are the few key reasons for you to invest in debt funds:

1. Debt funds are the best option for an investor with a low risk appetite.

2. It helps fund houses to bring stability in a portfolio for diversification of mutual funds.

3. Debt funds are highly liquid which can be easily converted in to cash, that too, within a day time.

4. There is no deduction of tax or TDS on the earning from debt funds. Taxes are to be paid only when an investor sells or withdraws fund units and depending on the period of investment.

5. Provides better returns on investment as compared to bank FDs and parks surplus money in savings account.

6. Debt fund has low transaction cost as compared to the other mutual fund.

Conclusion

Debt funds are low-risk mutual funds which invest most of their money into fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificate of deposit, treasury bills etc.

Debt funds are preferred by individuals who are not willing to invest in the highly volatile equity markets.

But please 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 ratio really does matter when investing in debt mutual funds.

Also Read: 5 Reasons Why Debt Funds Are Better Than Fixed Deposits

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww

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