Best Union Debt Mutual Funds

Formerly known as Union KBC Mutual Fund, Union Mutual Fund is today jointly sponsored by the Union Bank of India and Dai-ichi Life. The larger shareholder, UBI, is a nationalised bank with over 4000 branches in India, while Dai-ichi Life is a top insurance company in Japan. Since its establishment over a decade ago, Union Mutual Fund has gained over Rs.6000 crore in assets under management. 

The AMC provides around 17 open-ended mutual fund schemes in equities, hybrid, and debt fund categories. 

Debt funds are mutual fund schemes that invest in fixed-income instruments, including treasury bills, corporate bonds, government securities, money market instruments, commercial papers, etc. The best Union debt mutual funds generate income from periodic interests and buying/selling the underlying securities. As a result, these instruments provide a steady capital appreciation and interest income that isn’t directly affected by market fluctuations.

The major advantages of debt funds are their reasonable safety, relative stability, predictable returns, high liquidity, and a low-cost structure. In addition, their relatively fixed returns and lack of capital risks suit risk-averse outlooks. While they’re slightly more volatile than fixed deposits, the top Union debt mutual funds offer better returns without undue risks. 

Union Mutual Fund offers around 5 debt fund schemes. These invest in debt instruments involving varying maturity periods from corporate and government issuers. 

There are several choices of debt funds with different asset allocations and maturity periods to suit diverse needs. Funds invested in debt securities with short maturity periods like overnight funds, liquid funds, and ultra-short funds have high liquidity and low risks. Those with long-term maturity periods generate better returns but are susceptible to interest rate risks. 

Debt funds also come in different types based on asset allocations. Money market funds invest in money market instruments, gilt funds in government securities, and corporate bond funds invest 80% of total assets in AAA-rated corporate bonds. Other debt funds include dynamic bonds with a changing portfolio composition and credit risk funds that invest in low-rated securities for better returns. Fixed Monthly Plans (FMP) are close-ended debt funds with a fixed investment horizon like fixed deposits. 

Factors to Consider Before Investing

There are several essential factors investors should look out for before choosing the best Union debt mutual fund. 

Risk factor: The returns of debt funds are not directly impacted by market fluctuations but rather depend on interest rates. An increase in interest rates can cause bond prices to fall and vice versa. However, this movement is usually slower and more predictable, making debt funds much safer compared to hybrid and equity funds. Some debt funds invest in low-credit rated bonds intentionally to get better returns. These types of funds can have some level of credit risks. 

Returns: A debt fund’s performance depends on its asset allotment, interest rate regimes, and liquidity. With a fall in interest rates, bond prices increase, leading to an increase in your fund’s NAV. However, fluctuations in NAV are common, even with government securities. The best Union debt mutual funds offer relatively stable returns with steady capital appreciation. 

Financial goals: Debts funds offer stable returns with some amount of capital appreciation that can be just enough to beat inflation. This predictability makes them suitable for conservative approaches with short-term or medium-term investment horizon. In addition, their low-risk factor also aids in stabilising portfolio returns. 

Investment horizon: Investors may want to consider the period they want to keep their savings locked before choosing an appropriate scheme. It helps immensely in the shortlisting process. This way, one can select the best Union debt mutual funds per their inclination. 

Costs: AMCs charge a certain percentage of assets as a fee to manage schemes. You can look at expense ratios of the best Union debt mutual funds to make an informed decision.

Credit rating: Debt funds can invest in bonds with a range of credit ratings. These are assigned to issuers of bonds per their financial stability and wherewithal to repay timely. Hence, a scheme that allocates its resources to high-rated bonds will be more stable in terms of returns. Conversely, higher investment in low-rated bonds implies higher credit risk, leading to fluctuating returns. However, the latter kind provides higher returns to compensate for the greater risk. 

Investment method: Investors can buy units of the best Union debt mutual funds via SIP or lump-sum. SIP is where investors can deposit a fixed sum periodically and buy units at those days’ NAV. Lump-sum is where there’s no obligation to deposit an amount periodically but rather requires a one-time investment. 

Taxability

Besides these, investors shall also be familiar with taxes on debt mutual funds. Based on the holding period, certain taxes apply on capital gains from mutual funds. 

Long-term Capital Gains Tax: Capital gains earned after three years of investment attracts long-term capital gains tax of 20% after indexation.

Short-term Capital Gains Tax: If the investment period is fewer than three years, short-term capital gains are added to an investor’s taxable income.

TDS: TDS does not apply to debt mutual funds.

Investors need to do thorough research on the above-mentioned parameters to choose the best Union debt mutual funds 2023.