Top Debt Funds

Debt funds invest in short- and long-term assets such as treasury bills, government securities, debentures, commercial paper, certificates of deposit, and other securities issued by governments, public financial institutions, and businesses.

Bonds and other debt instruments make up the majority of an investment in a debt fund, commonly referred to as an income fund.

The returns on a debt fund are based on the income earned by the underlying investment assets, as well as any changes in interest rates and credit rating during the time frame of the debt fund.

Their goal is to generate the maximum returns on investments within a high margin of safety and security which controls for risk with low transaction costs.

Listed below are 300+ debt mutual funds by top Asset Management Companies (AMCs). You can filter these funds based on your risk appetite, AMC, returns, ratings and benchmark index.

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What are debt funds?

Debt mutual funds are a segment of mutual funds that primarily invest in fixed income instruments such as corporate debt securities, money market instruments, and government and corporate bonds which offer capital appreciation.

These instruments offer fixed maturity dates and interest rates which ensures a higher degree of safety due to the lower credit risk because you are essentially lending money.

According on the tenure of the securities held in the portfolio, the issuers of the securities, or their fund management strategies, debt funds can be divided into three categories:

 

1. Short-term funds, medium-term funds, and long-term funds.

2. Infrastructure debt fund, corporate bond fund, gilt fund, and treasury fund

3. Fixed maturity plans, floating rate funds, and dynamic bond funds 

 

Debt funds have the capacity to preserve capital and generate revenue. Most debt funds invest in a similar range of debt instruments and are suited to a conservative risk profile.

Who should invest in debt funds?

Debt funds are the preferred choice of conservative investors. They are also suitable for people with both short-term and medium-term investment horizons. Short-term ranges from three months to one year, while medium-term ranges from three years to five years.
 

1. Short-term debt funds
For a short-term investor, debt funds like liquid funds may be an ideal investment, compared to keeping your money in a saving bank account.

2. Medium-term debt funds
For a medium-term investor, debt funds like dynamic bond funds are ideal for riding out the interest rate volatility. When compared to 5-year bank FDs, debt bond funds offer higher returns. Investing in debt funds is ideal for risk-averse investors as they invest in securities that offer interest at a predefined rate and return the principal invested in full upon maturity.

3. Interest rate risk
Market price of the bond and interest rates carry an opposing relationship. Whenever interest rates in the market go up, the market prices of bond come down.

4. Weighted average maturity of the portfolio
A portfolio of the debt mutual fund consists of various debt instruments maturing at different points of time. By looking at the average maturity of the portfolio one can identify whether the fund has invested in short, medium or long-term debt papers. Higher the weighted average maturity, longer the term papers of the portfolio and hence higher the duration. High duration in a fund means higher volatility and vice-e-versa.

What are the risks associated with debt funds?

Every investment possesses some degree of inherent risk. Debt funds share some risks that are common across all mutual funds, such as no guarantee or assured returns and loss of principal amount due to market volatility, interest rate fluctuations, changes in government policy, and political developments. Apart from these common factors, there are some risks that specifically relate to debt funds. These risks are a direct result of the volatility inherent in the debt market, and include:
 

1. Risk of total loss - Debt and related securities can potentially result in total loss of principal investments.

2. Price risk – Market conditions can result in daily price fluctuations.

3. Liquidity risk – Settlement periods can be unpredictably extended and the ability to sell can be restricted by overall trading volume of specific stocks in the portfolio. This limits the ability of the fund to sell held securities which can result in potential losses and fall in value of the scheme.

4. Event risk – Any unexpected or detrimental event impacting a company or industry in which the mutual fund is invested can result in a price risk.

How to pick the right fund/scheme?

Investing in the right debt fund scheme differs from person to person. It is based on various factors – the most important being the ability to bear risk and the willingness to take on the risk. Determining your own risk-profile is essential in picking the right fund/scheme. Other major factors include the financial goal and the time horizon for the investment. Here are some of the key factors to consider when selecting a debt fund right for your needs:

 

1. Investment strategy/objective: Every fund has a declared investment strategy and objective, that explains their approach to investment. Investors should understand the approach taken by these funds so they can decide if it matches with their personal preference.

2. Match goals: Your investment goals can vary from tax savings to long-term capital appreciation. Knowing this can help you find funds that can support these goals.

3. Risk vs. reward: Debt funds take higher risks for proportionately higher rewards. By analysing the risks taken by the mutual fund, investors can discover if they match with their own personal risk profile and preferences.

4. Liquidity preference: Investors should know when they will need their investment corpus. Debt funds are designed for medium to long-term returns, with a minimum period of one year for any results to materialise. If your liquidity requirements are shorter than that, consider investing in debt funds instead.

Frequently asked questions

What are Debt mutual funds?

Debt funds invest in all kinds of debt which can also be considered as lending money to the entity issuing the fund, such as treasury-bills, government securities, commercial paper, certificates of deposits, money market instruments, securitised debt, and corporate bonds. These funds have a fixed maturity date and interest rate that the buyers could earn till the maturity of the security. Debt funds invest in a variety of securities, based on their credit ratings. A security’s credit rating signifies the risk of default in disbursing the returns that the debt instrument issuer promised.

Are debt funds tax free?

Short-term capital gains (if the units are sold before 36 months) in debt mutual funds are taxed as per applicable tax rate of the investor. Therefore, if your tax rate is 30% then short-term capital gains tax on debt fund is 30% + 4% cess. Long-term capital gains (if the units are sold after 36 months) in debt fund are taxed at 20% with indexation. Also, Dividends received by investors are added to their overall income and taxed at the income tax slab rate they fall under. 

Are debt funds risky?

Debt funds are considered low-risk investments because you are essentially lending money. However, there are some risks to keep in mind. They are:
 

1. The interest rate risk- Bond value is connected to the interest rate. So when interest rates rise, bond prices fall and vice versa

2. Inflation risk- Bonds provide fixed returns at regular intervals. But if the rate of inflation grows faster than the fixed amount of income, the investor’s money is devaluing.

3. Credit risk- There is always the risk with any lending, that the borrower defaults. In debt funds this is rare, but possible.

Which debt funds are safest?

Overnight funds and liquid funds are the safest because they are short-term which reduces the interest rate risk and credit risk that these funds can take. 
Overnight funds mature in 1-day. Liquid funds can only invest in debt and money market securities that mature in or up to 91 days.

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Disclaimer

Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies.  BFL is also registered with the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).  

BFL does NOT:

(i) provide investment advisory services in any manner or form;

(ii) perform risk profiling of the investor;

(iii) carry customized/personalized suitability assessment;

(iv) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.


In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on ‘As-is’ basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme /Offer related documents carefully.  The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk.  Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund.  BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other / better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Bajaj Finserv Direct Limited, (“BFDL”), a wholly owned subsidiary of Bajaj Finserv Limited (is a Registered with SEBI as an Investment Advisor with Registration no. INA000016083).  BFDL enables resident Indian customers to directly invest in third party mutual funds through its online platform.  BFDL entered into a referral arrangement with BFL, whereunder, BFL may, without risk or responsibility on its part, refer the resident Indian customers who are interested in placing their investments in Direct Mutual Funds through BFDL online platform.  Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc. and shall also consult their financial advisers, if they are unsure about the suitability of the scheme before investing

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