Best Debt Mutual Funds

Debt funds are mutual funds investing in such debt instruments. They are of different kinds depending on the kind of debt instruments they invest in.

Higher the credit rating of the debtor, lesser the chance of default and hence lesser the risk is – however, returns for such instruments can be lower. Lower the duration of the debt, lesser the probability of interest rate fluctuation and hence lesser the uncertainty of returns.

Here are various types of debt funds:

Debt – Liquid Funds

These invest in short term (90 days) bonds and other similar instruments. One can use them as an emergency fund. These are meant for parking your money and keep it handy so that you can redeem it as and when required. Returns are taxed as per your income tax slab if sold before three years.

Purpose: Invest in these funds if you want to park your money as an emergency fund, and redeem as per need.

Debt – Ultra Short Term Funds

These funds invest in short term (one year) bonds. If you are saving for very short-term goals like a vacation or buying an automobile, then this category is ideal for gains within one year. It is also an excellent resort to park your money until you decide where to invest or spend next. Returns are taxed as per your income tax slab if sold before three years and have negligible tax post that period.

Purpose: Invest here for your short term goals like a vacation, buying a bike, jewelry or expensive gadget.

Debt – Short Term Funds

Short term funds are similar to ultra-short term investments but with a duration of approximately three years. If your goals are to manage expenses while buying a house or planning a marriage within one to three years, then this category can help you with decent returns without any risk factors. Returns are taxed as per your income tax slab if sold before three years and have negligible tax (20% with indexation benefit) post that period.

Purpose: Invest in these funds if you are aiming to buy a house or plan a wedding within three years.

Debt - Dynamic Mutual Funds

These funds switch aggressively between short term and long term debt funds with a real opportunistic performance. These invest in a nutshell to long term bonds, etc. with an objective to generate regular income by changing allocation across different segments. Returns are taxed as per your income tax slab if sold before three years. After three years, long term capital gains tax apply (negligible).

Purpose: Invest in these funds with an objective to generate regular dividend/income.

Debt – Credit Opportunities

These funds show similar action like Debt – Dynamic by investing in debt ranging from short to long term with an objective to generate high-interest income, but the investment goes to low-grade corporate bonds. If you are willing to take the risk for higher gains, then this category is something you should look at. These funds are suitable for Monthly Income Plans(MIP) funds to invest in Medium to Long term bonds.

Purpose: Invest in these funds when you are ready to risk your monthly income generation plan. The category can be clubbed with debt- dynamic to lower down the risk factor.

Debt – MIP (Monthly Income Plans)

MIP (Monthly Income Plan) invests a small portion of the portfolio in equities (10-20%) and rest in the fixed income securities. Their objective is to generate regular monthly income. Monthly Income Plans funds invest in Medium to Long term bonds, etc. with an aim to produce a monthly dividend. Returns are taxed as per your income tax slab if sold before three years and have negligible tax (20% with indexation benefit) post that period.

Purpose: Invest in these funds if you are looking to generate monthly income with little risk.

Debt - Gilt

If you are a kind of a person who would want to go for funds that are safe and provide high returns than Debt Gilt is something which you shouldn’t avoid. These funds invest in the fixed income securities issued by Government of India with almost zero risks to the investor. The returns range from anything between 10 percent to 13 percent or more depending on the area of investment.

Returns are taxed as per your income slab if sold before three years and post that negligible tax (20% indexation benefit) post three years.

Purpose: Invest to gain good returns without taking much of risks.

Debt - Income

So we described Dynamic Funds and explained how they change their investment to maximize the profit, similarly in the debt income funds, the investments are made in the bonds to generate regular sources of revenue without much of risk. They change allocation among different debt segments to maximize the returns.

The risk is low, and returns are good ranging from 9 to 10 percent. Returns are taxed as per your salary slab if sold before three years post that negligible tax (20% with indexation benefit) post three years.

Purpose: To generate secondary sources of income from investments without taking much of risks.

Top 10 Debt Mutual Funds

Fund NameCategoryRisk1Y ReturnsRatingFund Size(in Cr)
ICICI Prudential Liquid FundDebtLow7.3%5star47,684
Indiabulls Liquid FundDebtLow7.3%5star3,423
HDFC Short Term Debt Fund DebtModerately Low5.7%5star9,490
Franklin India Dynamic Accrual FundDebtModerate6.8%5star3,008
Franklin India Low Duration FundDebtModerate7.5%5star6,601
Franklin India Ultra Short Bond FundDebtModerate7.9%5star15,135
Franklin India STIPDebtModerate7.0%5star9,280
Aditya Birla Sun Life Corporate Bond FundDebtModerately Low5.5%5star13,271
Kotak Low Duration FundDebtModerate7.2%5star5,001
L&T Money Market FundDebtModerately Low7.4%5star1,157
Indiabulls Short Term FundDebtLow6.7%4star210
DHFL Pramerica Short Maturity FundDebtModerate5.1%4star1,124
SBI Magnum Constant Maturity FundDebtModerately Low6.8%4star332
Essel Liquid FundDebtLow7.4%4star1,029
Indiabulls Ultra Short Term FundDebtModerately Low7.0%4star304
View All Top 10 Debt Mutual Funds

Let's have a closer look

Now let us jump and check about these top 10 mutual fund schemes.

ICICI Prudential Liquid Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Liquid segment and provided 7.28% annualized returns in the last 3 years. In the last 1 year, it gave 7.28% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 7.28% returns in the last 1 year. Groww rated this fund as 5 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Rahul Goswami, Rohan Maru

Launch Date31 Dec 2012
Min Investment Amt100
Groww Rating5star
AUM47,684Cr
1Y Returns7.3%

Indiabulls Liquid Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Liquid segment and provided 7.42% annualized returns in the last 3 years. In the last 1 year, it gave 7.28% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 7.28% returns in the last 1 year. Groww rated this fund as 5 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Malay Shah

Launch Date31 Dec 2012
Min Investment Amt500
Groww Rating5star
AUM3,423Cr
1Y Returns7.3%

HDFC Short Term Debt Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Short Duration segment and provided 7.5% annualized returns in the last 3 years. In the last 1 year, it gave 5.72% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 5.72% returns in the last 1 year. Groww rated this fund as 5 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Anil Bamboli

Launch Date31 Dec 2012
Min Investment Amt5,000
Groww Rating5star
AUM9,490Cr
1Y Returns5.7%

Franklin India Dynamic Accrual Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Dynamic segment and provided 9.32% annualized returns in the last 3 years. In the last 1 year, it gave 6.8% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 6.8% returns in the last 1 year. Groww rated this fund as 5 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Sachin Padwal-Desai, Santosh Kamath, Umesh Sharma

Launch Date31 Dec 2012
Min Investment Amt10,000
Groww Rating5star
AUM3,008Cr
1Y Returns6.8%

Franklin India Low Duration Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Low Duration segment and provided 8.95% annualized returns in the last 3 years. In the last 1 year, it gave 7.54% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 7.54% returns in the last 1 year. Groww rated this fund as 5 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Santosh Kamath, Kunal Agrawal

Launch Date31 Dec 2012
Min Investment Amt10,000
Groww Rating5star
AUM6,601Cr
1Y Returns7.5%

Franklin India Ultra Short Bond Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Ultra Short Duration segment and provided 8.81% annualized returns in the last 3 years. In the last 1 year, it gave 7.87% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 7.87% returns in the last 1 year. Groww rated this fund as 5 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Sachin Padwal-Desai, Pallab Roy

Launch Date31 Dec 2012
Min Investment Amt10,000
Groww Rating5star
AUM15,135Cr
1Y Returns7.9%

Franklin India STIP - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Short Duration segment and provided 8.7% annualized returns in the last 3 years. In the last 1 year, it gave 6.95% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 6.95% returns in the last 1 year. Groww rated this fund as 5 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Santosh Kamath, Kunal Agrawal

Launch Date31 Dec 2012
Min Investment Amt5,000
Groww Rating5star
AUM9,280Cr
1Y Returns7.0%

Aditya Birla Sun Life Corporate Bond Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Corporate Bond segment and provided 7.77% annualized returns in the last 3 years. In the last 1 year, it gave 5.49% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 5.49% returns in the last 1 year. Groww rated this fund as 5 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Maneesh Dangi, Kaustubh Gupta

Launch Date31 Dec 2012
Min Investment Amt1,000
Groww Rating5star
AUM13,271Cr
1Y Returns5.5%

Kotak Low Duration Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Low Duration segment and provided 8.54% annualized returns in the last 3 years. In the last 1 year, it gave 7.24% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 7.24% returns in the last 1 year. Groww rated this fund as 5 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Deepak Agrawal

Launch Date31 Dec 2012
Min Investment Amt5,000
Groww Rating5star
AUM5,001Cr
1Y Returns7.2%

L&T Money Market Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Money Market segment and provided 8.46% annualized returns in the last 3 years. In the last 1 year, it gave 7.36% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 7.36% returns in the last 1 year. Groww rated this fund as 5 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Jalpan Shah, Vikas Garg

Launch Date31 Dec 2012
Min Investment Amt10,000
Groww Rating5star
AUM1,157Cr
1Y Returns7.4%

Indiabulls Short Term Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Short Duration segment and provided 8.21% annualized returns in the last 3 years. In the last 1 year, it gave 6.74% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 6.74% returns in the last 1 year. Groww rated this fund as 4 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Malay Shah

Launch Date12 Sep 2013
Min Investment Amt500
Groww Rating4star
AUM210Cr
1Y Returns6.7%

DHFL Pramerica Short Maturity Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Short Duration segment and provided -100% annualized returns in the last 3 years. In the last 1 year, it gave 5.08% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 5.08% returns in the last 1 year. Groww rated this fund as 4 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Puneet Pal, Kumaresh Ramakrishnan

Launch Date1 Jan 2013
Min Investment Amt5,000
Groww Rating4star
AUM1,124Cr
1Y Returns5.1%

SBI Magnum Constant Maturity Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Gilt segment and provided 9.2% annualized returns in the last 3 years. In the last 1 year, it gave 6.77% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 6.77% returns in the last 1 year. Groww rated this fund as 4 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Dinesh Ahuja

Launch Date1 Jan 2013
Min Investment Amt5,000
Groww Rating4star
AUM332Cr
1Y Returns6.8%

Essel Liquid Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Liquid segment and provided 7.44% annualized returns in the last 3 years. In the last 1 year, it gave 7.36% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 7.36% returns in the last 1 year. Groww rated this fund as 4 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Killol Pandya, Archit Shah

Launch Date31 Dec 2012
Min Investment Amt1,000
Groww Rating4star
AUM1,029Cr
1Y Returns7.4%

Indiabulls Ultra Short Term Fund - Direct - Growth

Fund Performance: This fund has consistently beaten its benchmark in Ultra Short Duration segment and provided 8.09% annualized returns in the last 3 years. In the last 1 year, it gave 7.03% returns.

Why to invest: The fund has consistently beaten other funds in same category along with its benchmark and provided 7.03% returns in the last 1 year. Groww rated this fund as 4 Star. This is one of the best Debt mutual fund in India.

Fund Manager: Malay Shah

Launch Date31 Dec 2012
Min Investment Amt500
Groww Rating4star
AUM304Cr
1Y Returns7.0%

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Volatility in Debt Mutual Funds

Debt funds are preferred by individuals who are not willing to invest in the highly volatile equity markets. A debt fund provides a steady but low-income, relative to equity. It is comparatively less volatile.

Tax Benefits in Debt Mutual Funds

In terms of taxation, debt funds score better than bank FDs. If you hold your investments for more than 3 years, you just need to pay only 20% capital gains tax (with indexation benefits). Since you take indexation benefit (that means adjusting the cost of your investment for inflation), your ‘real’ tax outgo will be far lower than the 20 percent. Be it in terms of liquidity, superior returns or tax benefits, debt mutual funds score over passive bank deposits. Diversify your traditional debt holding with these schemes, based on the time frame of investments to take advantage of them.

Who issues Debt Mutual Funds?

Asset management companies (or AMCs or fund houses) create mutual funds. All AMCs will have to be approved by the government body, Securities and Exchange Board of India (SEBI).

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Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.
Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.
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