Best Debt Mutual Funds in India

Debt mutual funds invest in fixed-income assets such as corporate bonds, treasury bills, money market instruments, government bonds, and certificates of deposit. The primary goal of these funds is to provide investors with a consistent income from the interest collected on debt instruments. They have become a popular investment option for people who want consistent returns at a lower risk than equities. To find the finest debt mutual funds that meet your investing objectives, consider the fund's performance, risk profile, investment strategy, and risk tolerance. Let’s explore some of the best debt mutual funds in India.
 

What are Debt Mutual Funds? 

A debt mutual fund invests in various types of debt securities issued. It may include corporate bonds and debentures, money market products like commercial papers, and government-issued securities. Companies issue bonds to raise capital for business expansion. Whereas, governments may issue bonds to obtain funds for social welfare or infrastructure projects. A debt mutual fund invests in all these types of bonds. The interest obtained from these bonds is distributed to the investors.
 

 

List of Debt Mutual Funds in India

Here’s a list of the best debt funds in India.

Name

AUM 

3Y CAGR 

5Y CAGR 

ICICI Pru Overnight Fund

₹10,166 Cr

5.43%   

4.77%   

Nippon India Nivesh Lakshya Fund

₹7,706 Cr

6.97%   

7.12%   

Edelweiss Banking and PSU Debt Fund

₹281 Cr

5.6%     

7.62%   

ICICI Pru Constant Maturity Gilt Fund

₹2,994 Cr

5.41%   

7.26%   

HSBC Corporate Bond Fund

₹5,965 Cr

5.43%   

7.22%   

Axis Dynamic Bond Fund

₹1,703 Crs

5.49%   

7.32%

Bandhan G-Sec-Constant Maturity Plan

₹337 Crs

5.15%

6.86%

Aditya Birla SL Short Term Fund

₹7,497 Crs

6.39%

7.53%

Axis Strategic Bond Fund

₹1,932 Crs

6.81%

7.99%

SBI Magnum Constant Maturity Fund

₹1,621 Crs

5.63%

6.79%

Disclaimer: The above information contains data updated as of 26th June 2024. However, it is important to conduct thorough research before making any investment decisions in these stocks. 
 

Best Debt Funds In India Overview 

Let’s take a closer look at the best debt funds in India.

 ICICI Prudential Overnight Fund

ICICI Prudential Overnight Fund is the top-performing debt fund, with a reasonable 5-year CAGR. It offers high liquidity by investing mainly in overnight securities. With a 0.1% expense ratio, it appeals to investors looking for short-term investment opportunities. The fund's large AUM of Rs. ₹10,166 crores indicates its popularity and trustworthiness among investors. 

Nippon India Nivesh Lakshya Fund

Nippon India Nivesh Lakshya Fund invests in government securities, to achieve optimal returns without high risk. It may be suitable for investors looking for long-term investment opportunities as its portfolio includes 96.78% government bonds. The fund’s 5-year CAGR is also quite reasonable, making it a top debt fund for moderate-risk investors.

Edelweiss Banking & PSU Debt Fund

Edelweiss Banking and PSU Debt Fund is a debt mutual fund that focuses on high-quality debt instruments from banks, public sector undertakings (PSUs), and public financial institutions. With an AUM of Rs. 281 crores and a focus on AAA-rated and government securities, the fund looks to give steady returns. It can be one of the best debt funds for conservative investors looking for regular income in the medium to long term.

ICICI Pru Constant Maturity Gilt Fund

The ICICI Prudential Constant Maturity Gilt Fund invests in government securities with a 10-year duration. With an AUM of Rs. ₹2,994 crores and an expense ratio of 0.23%, it is suitable for investors looking for long-term returns higher than inflation. The fund invests mostly in government bonds, which ensures good credit quality and safety. Its performance is quite good, with the highest returns among long-term funds. 

HSBC Corporate Bond Fund

The HSBC Corporate Bond Fund is a UK-based fund that aims to outperform the Markit iBoxx GBP Corporates Index in addition to 1% annually over three years. It generally invests in investment-grade bonds issued or hedged in pound sterling, including those issued by corporations, supranational organisations, and government-backed entities.

Axis Dynamic Bond Fund

Axis Dynamic Bond Fund is a flexible debt fund that changes its portfolio across various debt and money market instruments to mitigate interest rate volatility. Launched in 2013, it has an AUM of Rs. 1,₹1,703 crores. The fund invests 96.83% in debt. 30.92% is invested in government securities and 65.91% in low-risk assets. It is one of the top debt mutual funds for those seeking moderate-risk investing opportunities with the freedom to select bonds.

Bandhan G-Sec - Constant Maturity Plan

Bandhan Government Securities Fund-Constant Maturity Plan is an open-ended debt fund that invests in government securities with a 10-year fixed maturity. It has very high interest rates and minimal credit risk. The fund invests mostly in government bonds, state development loans, treasury bills, and cash management bills. With an average maturity of around ten years, it can be appropriate for investors with a minimum investment horizon of three years.

Aditya Birla SL Short-term Fund

Aditya Birla Sun Life Short Term Fund is one of the top short-term debt funds offering income and capital appreciation by investing in a diverse range of debt and money market assets. With a Macaulay duration of 1-3 years, the portfolio’s interest rate risk and credit risk are a bit high. It is one of the top shorter-duration debt funds for investors seeking income and capital growth in 1 to 3 years. It has enough liquidity and a diverse portfolio with an investment of Rs. 1,000.

Axis Strategic Bond Fund 

Axis Strategic Bond Fund is an open-ended medium-term debt fund. Its aim is to maximise returns by investing in all kinds of debt and money market instruments. The fund has an AUM of Rs. 1,932 crores and an expense ratio of 0.35%. Moreover, the fund has a very considerable rate of compounded annual growth over 5 years. 

SBI Magnum Constant Maturity Fund

SBI Magnum Constant Maturity Fund is an open-ended debt plan that invests in government securities having a fixed maturity of around ten years. It seeks to generate profits by investing primarily in Central and State Government securities, which have a relatively high interest rate risk and a low credit risk. The fund is managed using an active interest rate risk approach, appropriate for investors with long investment horizons.
 

How to Choose the Best Debt Mutual Funds for You?

Assess the following factors to determine whether a debt fund is appropriate for you or not:

  • Investment Horizon: Consider the time period for which you want to stay involved in a debt fund. It can be just a day or 10-20 years. Overnight funds have the shortest average maturity of one day. Long-duration and gilt funds are examples of debt funds that hold assets with extended average maturities.
  • Risk Appetite: While all debt schemes involve interest rate, credit, and inflation risk, the degree of risk differs for each fund. Liquid and overnight funds have the lowest interest rate risk, whereas a gilt fund has the lowest credit risk. Properly check the risks involved with debt funds before investing in them.
  • Interest Rate Trend: When interest rates increase, it is better to invest in short-term funds than long-term funds. This is because when interest rates rise, the adjusted duration of long-term debt funds will increase. Similarly, longer-term debt funds are advantageous when interest rates are low.
     

Who Should Invest in Debt Mutual Funds?

The following types of investors can invest in debt mutual funds. 

  • Low-risk investors: Individuals focused on capital preservation over large profits and want a consistent income.
  • Investors seeking regular income: Investors who require a consistent income to cover their costs, such as retired individuals.
  • Risk-averse investors: Individuals looking to escape the volatility of equities markets and search for safer investing opportunities.
  • Investors with short to medium-term goals: Investors with short or medium-term financial objectives, such as saving for a car or wedding.
  • Investors looking for Diversification: Investors who want to properly manage risk, investors look to balance their investment portfolio with a mix of stock and debt.
     

Advantages of Investing in Debt Mutual Funds

Here are the key advantages of debt mutual funds.

  • Regular income: Debt funds distribute the interests on the underlying securities. It is ideal for investors looking for a consistent income source.
  • Low risk: Debt mutual funds are often less risky than stocks. Fixed-income instruments, which generally have a defined interest rate and maturity date, help to decrease the risk involved in debt funds.
  • Portfolio diversification: Debt funds can diversify your portfolio as they invest in several debt instruments. This can cover or reduce losses due to the poor performance of some assets in your portfolio.
  • Professional Management: Generally, expert fund managers look after the debt funds. They utilise their knowledge and experience to make the right investments to ensure profits and risk management.
  • High Liquidity: Debt mutual funds are easily converted to cash. During a financial emergency, investors can redeem their units more quickly than other investment choices, such as fixed deposits.
  • Lower Costs: According to SEBI regulations, the expense ratio of debt funds cannot exceed 2%. Overnight and liquid funds have very low expense ratios.
  • Indexation: Debt funds provide indexation benefits for long-term investments. So, the cost of investment is adjusted depending on inflation rates while calculating capital gains tax. 
  • Partial Withdrawals: Investors can make partial withdrawals from debt funds to fulfil any essential financial obligations.
     

Risks Involved While Investing in Debt Funds

The following are some risks associated with debt funds.

  • Interest rate risk: It depends on market interest rates. Even though the best debt funds are quite safe, they are still exposed to the market. 
  • Credit risk: It is the risk of a debt fund's bonds defaulting on interest and principal payments. Even liquid funds are not fully safe from the effects of credit default.
  • Exit Load: Though these funds perform well in the short to medium term, they may incur an exit load when you leave, which you should be aware of before selling the fund. 

     

Conclusion 
Debt mutual funds are a unique type of investment instrument which invests in different types of debt securities. They are quite helpful for passive investors looking for a regular income. They often distribute the interests obtained from the debt instruments. You can invest in various debt funds on a good stock market app. There are several debt mutual funds to pick from that can fulfil the investment objectives of investors. However, select the best debt funds to invest in based on your investment horizon. Remember that debt funds are not completely risk-free because they are market-linked instruments. Analyse all the factors before investing in any fund.

FAQs on Debt Mutual Funds

Debt funds usually outperform fixed deposits. Moreover, the lower risks associated with these funds make them an attractive investment option for low-risk investors.

Debt funds have lower risks, but they are not risk-free. They invest more in bonds and securities. However, interest rate and credit risk are some key factors you should always keep an eye on.

Yes, you can start a systematic investment plan or SIP for investing in debt funds. Most mutual fund platforms offer this facility.

For your short-term goals, short-term debt funds may be a better choice. However, long-term debt funds may offer higher returns in the long run. You can choose between the two types depending on your objectives, risk tolerance, and time horizon.

No. Debt mutual funds do not have a lock-in period. You can withdraw your investments from a debt fund at any time.