Best Performing Debt Funds in 2024
Debt mutual funds in India have become a popular investment choice for those seeking stable returns with relatively lower risk than equity investments. These funds primarily invest in fixed-income securities like government bonds, corporate bonds, treasury bills, and other money market instruments, thus making it a low-risk investment scheme compared to equity investment. To identify the best debt mutual funds that align with your investment goals, you should evaluate the fund’s performance, risk profile, investment strategy, and risk tolerance.
In this blog, we will delve deeper into identifying the best Indian debt funds in the last 5 years and explore the benefits of investing in debt mutual funds.
Best Debt Funds in India 2024
Here is a list of top debt mutual funds that you can consider investing in India 2024.
| Name | Sub Category | AUM (Rs. in cr.) | Expense Ratio (%) | CAGR 5Y (%) | 3Y Avg Annual Rolling Return (%) |
|---|---|---|---|---|---|
| Bank of India Credit Risk Fund | Credit Risk Fund | 114.7 | 1.03 | 10.9 | 51.86 |
| Aditya Birla SL Medium Term Plan | Medium Duration Fund | 1,968.18 | 0.85 | 10.49 | 13.75 |
| JM Low Duration Fund | Low Duration Fund | 225.71 | 0.31 | 9.59 | 5.61 |
| UTI Dynamic Bond Fund | Dynamic Bond Fund | 560.42 | 0.66 | 8.95 | 10.48 |
| Baroda BNP Paribas Credit Risk Fund | Credit Risk Fund | 164.92 | 0.79 | 8.9 | 9.91 |
| Bank of India Short Term Income Fund | Short Duration Fund | 71.7 | 0.45 | 8.89 | 12.75 |
| DSP Credit Risk Fund | Credit Risk Fund | 191.25 | 0.4 | 8.76 | 10.69 |
| Aditya Birla SL Credit Risk Fund | Credit Risk Fund | 936 | 0.67 | 8.51 | 8.08 |
| ICICI Pru Credit Risk Fund | Credit Risk Fund | 6,387.09 | 0.76 | 8.16 | 7.21 |
| ICICI Pru All Seasons Bond Fund | Dynamic Bond Fund | 13,133.03 | 0.59 | 8.12 | 6.77 |
Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.
Note: The list of debt mutual funds is derived from Tickertape Mutual Fund Screener and is as of 21st November 2024. The parameters used to curate the list are as follows:
- Category: Debt
- Plan: Growth
- 5Y CAGR: Sort from highest to lowest.
About Top 10 Performing Debt Funds in India
Bank of India Credit Risk Fund
The Bank of India Credit Risk Fund primarily invests in debt securities rated below AAA to generate high yields. It aims to provide consistent returns through active management of credit risk.
As of 21st November 2024, the fund has an asset under management (AUM) of Rs. 114.70 cr. and an expense ratio of 1.03%. It has delivered a compound annual growth rate (CAGR) of 10.90% over the past five years and an average annual rolling return of 51.86% over the past three years.
Aditya Birla SL Medium Term Plan
Aditya Birla Sun Life Medium Term Plan focuses on medium-duration debt instruments, aiming to optimise returns through a mix of credit risk and interest rate strategies.
As of 21st November 2024, the fund’s AUM stands at Rs. 1968.18 cr., with an expense ratio of 0.85%. It has achieved a CAGR of 10.49% over five years and an average annual rolling return of 13.75% over the past three years.
JM Low Duration Fund
JM Low Duration Fund provides liquidity and returns through investments in low-duration debt securities. The fund focuses on short-term opportunities to achieve stable returns.
As of 21st November 2024, it holds an AUM of Rs. 225.71 cr., with a low expense ratio of 0.31%. The fund has a five-year CAGR of 9.59% and a three-year average annual rolling return of 5.61%.
UTI Dynamic Bond Fund
UTI Dynamic Bond Fund provides flexibility in managing debt portfolios by dynamically adjusting duration based on prevailing interest rates and market conditions.
As of 21st November 2024, its AUM is Rs. 560.42 cr., with an expense ratio of 0.66%. The fund has delivered a CAGR of 8.95% over five years and a three-year average annual rolling return of 10.48%.
Baroda BNP Paribas Credit Risk Fund
Baroda BNP Paribas Credit Risk Fund generates high yields by investing predominantly in lower-rated corporate bonds while maintaining an optimum balance of risk and returns.
As of 21st November 2024, the fund manages an AUM of Rs. 164.92 cr. and has an expense ratio of 0.79%. It has recorded a five-year CAGR of 8.90% and a three-year average annual rolling return of 9.91%.
Bank of India Short Term Income Fund
Bank of India Short Term Income Fund seeks to provide income through investments in short-duration debt instruments, prioritising stability and risk management.
As of 21st November 2024, the fund’s AUM is Rs. 71.70 cr., with an expense ratio of 0.45%. It has generated a CAGR of 8.89% over five years and an average annual rolling return of 12.75% over the past three years.
DSP Credit Risk Fund
DSP Credit Risk Fund aims to deliver higher returns by investing in corporate bonds rated below the highest credit rating while managing associated risks.
As of 21st November 2024, the fund’s AUM stands at Rs. 191.25 cr., with an expense ratio of 0.40%. It has achieved a five-year CAGR of 8.76% and a three-year average annual rolling return of 10.69%.
Aditya Birla SL Credit Risk Fund
Aditya Birla Sun Life Credit Risk Fund focuses on high-yield corporate bonds with medium to long-term maturities, seeking a balance between income generation and risk.
As of 21st November 2024, its AUM is Rs. 936.00 cr., with an expense ratio of 0.67%. The fund has a five-year CAGR of 8.51% and a three-year average annual rolling return of 8.08%.
ICICI Pru Credit Risk Fund
ICICI Prudential Credit Risk Fund invests predominantly in corporate bonds rated AA or lower, aiming to generate consistent income through active credit selection.
As of 21st November 2024, the fund’s AUM is Rs. 6387.09 cr., with an expense ratio of 0.76%. It has posted a five-year CAGR of 8.16% and a three-year average annual rolling return of 7.21%.
ICICI Pru All Seasons Bond Fund
ICICI Prudential All Seasons Bond Fund offers flexibility across duration and credit spectrum, adjusting its portfolio dynamically based on market conditions to maximise returns.
As of 21st November 2024, the fund manages an AUM of Rs. 13133.03 cr., with an expense ratio of 0.59%. It has delivered a CAGR of 8.12% over five years and a three-year average annual rolling return of 6.77%.
What are Debt Mutual Funds?
Debt mutual funds are investment schemes that primarily invest in fixed-income securities like bonds, treasury bills, and other money market instruments, aiming to provide investors with returns through interest income and capital appreciation.
Different Types of Debt Funds
Debt funds are mutual funds that primarily invest in fixed-income securities such as bonds, treasury bills, and corporate debt. They cater to investors seeking relatively stable returns with lower risk compared to equity funds. Here are the different types of debt funds:
1. Liquid Funds
These funds invest in short-term money market instruments with maturities of up to 91 days, offering high liquidity and low risk. They are suitable for investors looking to park surplus funds for a short period.
2. Ultra-Short Duration Funds
Ultra-short duration funds invest in instruments with maturities between 3 and 6 months, offering slightly higher returns than liquid funds. They balance liquidity and returns effectively.
3. Low Duration Funds
Low duration funds invest in securities with maturities between 6 months and a year. They are ideal for investors seeking returns higher than savings accounts but with moderate risk.
4. Short Duration Funds
These funds invest in debt instruments with durations of 1 to 3 years. They are suitable for conservative investors aiming for stable returns over a medium-term horizon.
5. Medium Duration Funds
Medium duration funds invest in securities with a portfolio duration of 3 to 4 years. They aim to generate higher returns by taking moderate interest rate risks.
6. Credit Risk Funds
Credit risk funds focus on lower-rated corporate bonds (AA or below) with the potential for higher returns. They aim to capitalise on the credit upgrade potential of these bonds but involve higher risk.
7. Dynamic Bond Funds
These funds actively adjust the portfolio duration based on changing interest rate scenarios. They invest across maturities and are ideal for investors seeking active interest rate management.
8. Corporate Bond Funds
Corporate bond funds invest predominantly in high-rated corporate debt instruments. They aim to generate consistent income with relatively low credit risk.
9. Gilt Funds
Gilt funds invest exclusively in government securities, offering high safety since these are backed by the government. They are ideal for risk-averse investors.
10. Money Market Funds
Money market funds invest in short-term debt instruments such as treasury bills, commercial papers, and certificates of deposit. These funds provide high liquidity and moderate returns.
11. Banking and PSU Funds
These funds invest in debt securities issued by banks, public sector undertakings (PSUs), and other public financial institutions. They are relatively safe and offer steady returns.
12. Fixed Maturity Plans (FMPs)
FMPs are close-ended debt funds that invest in securities matching the fund’s maturity period. They offer predictability in returns if held until maturity.
13. Floater Funds
Floater funds primarily invest in floating-rate instruments whose interest payouts are linked to market rates, making them less sensitive to interest rate changes.
14. Overnight Funds
Overnight funds invest in securities with a maturity of one day. They are the least risky debt funds, ideal for parking funds for an extremely short duration.
15. Long Duration Funds
These funds invest in instruments with a portfolio duration greater than 7 years. They are suited for investors with a long-term horizon and a higher appetite for interest rate risks.
How to Select the Best Debt Fund for Investment?
When selecting the best debt mutual funds, investors should consider the following factors:
- Investment Objective: While identifying the best debt fund for investment, ensure the fund’s investment strategy aligns with your financial goals and investment horizon.
- Risk Profile: Assess the fund’s risk profile in terms of credit risk, interest rate risk, and liquidity risk.
- Past Performance: While past performance is not indicative of future results, it can provide insights into the fund manager’s expertise and the fund’s consistency.
- Expense Ratio: Lower expense ratios can lead to higher net returns for investors.
Features of Debt Mutual Funds
Now that we have understood the debt mutual funds meaning, let’s learn more about its characteristics. Some of them have been mentioned below:
- Diversification: Debt funds invest across various debt instruments, mitigating risk by spreading investments.
- Lower Volatility: Compared to equity funds, debt funds are less volatile, offering more stability to the investment portfolio.
- Liquidity: These funds provide high liquidity, allowing investors to buy or sell units easily without significant impact on the market price.
- Regular Income: They aim to deliver regular income through interest earnings, making them suitable for investors seeking steady returns.
- Tax Efficiency: Debt funds offer tax-efficient returns over the long term, especially through indexation benefits for investments held for more than three years.
Who Should Invest in Debt Mutual Funds?
Investing in debt mutual funds is suitable for investors whose investment thesis aligns with the below-mentioned persona –
- Conservative Investors: Those who prioritise capital preservation over high returns and prefer stable income from their investments.
- Income Seekers: Investors who need regular income to meet their expenses, such as retirees.
- Risk-Averse Investors: Individuals who prefer avoiding the volatility of equity markets and are looking for safer investment avenues.
- Short to Medium-Term Goal Planners: Investors with financial goals that are 1 to 5 ys away, such as saving for a car, a wedding, or a down payment on a house.
- Portfolio Diversifiers: Investors looking to balance their investment portfolio with a mix of equity and debt to manage risk effectively.
Potential Risks Associated with Debt Mutual Funds
While debt mutual funds are considered safer than equity funds, they are not entirely risk-free. The main risks associated with debt funds include:
- Interest Rate Risk: The risk of bond prices falling due to rising interest rates.
- Credit Risk: The risk of default by the issuer of the bond, leading to potential losses.
- Liquidity Risk: The risk associated with selling a security without significantly impacting its price.
The returns from debt funds are generally more predictable and less volatile than equity funds. However, interest rate movements, the credit quality of the portfolio, and the fund’s investment strategy can influence it.
Advantages of Investing in Debt Mutual Funds
There are certain advantages of investing in the best debt mutual funds –
- Regular Income: Debt mutual funds often distribute income generated from the interest of the underlying securities. It is suitable for investors seeking a steady income stream.
- Lower Risk: Compared to equity investments, debt mutual funds generally offer lower risk. The risk is reduced due to investments in fixed-income securities, which typically have a predetermined interest rate and maturity date.
- Diversification Benefits: By investing in a variety of debt instruments, these funds help in spreading out risk. Diversification can protect against the poor performance of a single security or sector.
- Professional Management: Experienced fund managers manage debt mutual funds and make informed decisions on which securities to buy or sell. This expertise can potentially lead to better returns and risk management for the investor.
- Liquidity: These funds generally offer high liquidity, allowing investors to buy or sell their fund units on any business day. This feature is particularly beneficial for those needing to access their funds on short notice.
- Tax Efficiency: Unlike traditional fixed-income investments like bank fixed deposits, debt mutual funds can be more tax-efficient, especially for long-term investments. Previously, the government taxed long-term capital gains from debt mutual funds at a lower rate with indexation benefits, helping to reduce the tax burden. However, it’s important to note that tax laws are subject to change and can impact the tax efficiency of these investments.
- Indexation Benefit: For long-term investments, debt mutual funds offer the benefit of indexation, which adjusts the purchase price of investments for inflation before calculating capital gains tax. This could significantly reduce the tax liability. However, recent changes in tax laws have affected the availability of indexation benefits, so it’s crucial to stay updated on current tax regulations.
How Returns are Calculated on the Top Debt Mutual Funds?
Calculating returns on debt mutual funds involves several steps and factors, including the interest income from the securities in the fund’s portfolio, capital appreciation, and any dividends distributed. Here’s a step-by-step explanation of how returns are calculated on debt mutual funds –
Interest Income
You can calculate the interest income by summing up the interest received from each debt security in the portfolio. If a fund has multiple securities, you would calculate the weighted average of the interest income based on the proportion of each security in the portfolio.
Capital Appreciation
The price of bonds in the portfolio can increase or decrease based on interest rate movements. If interest rates fall, the price of existing bonds with higher interest rates generally rises, and vice versa. The capital appreciation or loss can be calculated as:
Capital Gain or Loss = (Selling Price – Purchase Price) * No. of Units
Dividend Distribution
If the fund opts to distribute income as dividends, this should be added to the total return. The dividend per unit can be calculated as:
Dividend Per Unit = Total Dividend Distributed / No.of Units Outstanding
Net Asset Value (NAV) Performance
The NAV reflects the value of each unit of the fund and is calculated as:
NAV = Total Assets – Total Liabilities / No. of Units Outstanding
The return based on NAV can be calculated using the formula for absolute return if the holding period is less than a year:
Absolute Return = ((Current NAV – Initial NAV) / Initial NAV) × 100
For periods longer than a year, the Compound Annual Growth Rate (CAGR) is used:
CAGR = (((Ending Value / Beginning Value)^(1 / Number of Years)) – 1) × 100
Yield to Maturity (YTM)
For an estimate of future returns, you can use the YTM, which is the total return anticipated on a bond if the bond is held until it matures. The formula for calculating expected 1-year returns using YTM is:
Expected 1 Year Returns = YTM + (Interest Rate Change × Modified Duration) – Expense Ratio
Indexation Benefit
For long-term investments, indexation benefits can be used to adjust the purchase price for inflation, which can reduce the capital gains tax liability. The formula for indexation is:
Indexed Purchase Price = Original Purchase Price × CII of the Sale Year / CII of the Purchase Year
where CII stands for Cost Inflation Index.
Note: By combining these calculations, you can arrive at the total returns from a debt mutual fund investment. It’s important to note that these calculations provide an estimate and actual returns can vary based on market conditions and the fund’s performance.
Tax Benefits on Debt Mutual Funds in India
| Taxation Type | Condition | Taxation Rate | After 1st April 2023 |
| Short-Term Capital Gain (STCG) | If sold before 3 years from the investment date | Added to income and taxed as per income tax slab | Applicable |
| Long-Term Capital Gain (LTCG) | If sold 3 years from the purchase date | 20% with indexation benefits and 10% without indexation benefits | Not applicable; gains added to taxable income and taxed at slab rate |
Indexation benefit is applied to your investment amount to tax your returns fairly, which factors in inflation. For example, if your fund generates a 10% return over 3-yr and the inflation in that period is 6%, you pay 20% tax on the difference between the return and inflation, i.e., 10-6 = 4%. Now the total tax is 4*20% = 0.8%, where you’ll be taxed for 10-0.8= 9.2% instead of 10% returns.*
5 Things to Consider Before Investing in Debt Mutual Funds
When considering investing in debt funds in India, here are five key factors to keep in mind:
- Credit Quality: Assess the average credit quality of the debt fund’s portfolio to ensure it aligns with your risk tolerance. Higher credit ratings typically indicate lower risk but also lower returns, while lower-rated instruments may offer higher yields but come with an increased risk of default.
- Portfolio Diversification: Ensure the fund’s portfolio is well-diversified to mitigate risks. Avoid funds with excessive exposure to a single issuer or group of companies, as this can lead to concentration risk and potentially significant losses in case of default.
- Interest Rate Risk: Consider the fund’s modified duration, which indicates its sensitivity to interest rate changes. Funds with longer durations are more vulnerable to interest rate fluctuations, which can impact the fund’s net asset value (NAV).
- Expense Ratio: Since debt funds generally offer modest returns, the expense ratio becomes a crucial factor. A lower expense ratio means higher net returns for the investor, making it an important consideration when choosing a debt fund.
- Investment Horizon and Maturity Profile: Match the fund’s duration profile with your investment horizon. Short-term funds are suitable for investment horizons of up to one year, while medium to long-term funds are better for longer investment periods. This alignment can help manage interest rate risk and ensure liquidity as per your needs.
To Wrap It Up…
Debt mutual funds offer a diversified investment option for those looking to earn stable returns with lower risk. By understanding the different types of debt funds, their investment strategies, and associated risks, investors can make informed decisions that align with their financial goals and risk tolerance.
As always, investors must conduct their own research and/or consult their financial advisor before investing.
Most Popular Mutual Funds:
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Frequently Asked Questions (FAQs) on the Best Debt Mutual Funds
Based on 5-yr CAGR, here is a list of top debt funds in India:
(a) ICICI Prudential Overnight Fund
(b) Nippon India Nivesh Lakshya Fund
(c) Edelweiss Banking and PSU Debt Fund
(d) ICICI Pru Constant Maturity Gilt Fund
(e) HSBC Corporate Bond Fund
Note: This information is provided for educational purposes and is not intended as a recommendation or endorsement.
Debt funds invest in fixed-income assets like corporate and government bonds, as well as other debt instruments. They generate returns from the interest and price appreciation of the underlying debt holdings.
Choosing between Fixed Deposits (FDs) and Debt Mutual Funds in India depends on personal financial objectives, risk appetite, and investment timeline. FDs can offer guaranteed returns and capital safety, ideal for risk-averse investors valuing security. In contrast, Debt Mutual Funds can offer higher returns through diversified investments in debt securities like government and corporate bonds.
Debt funds can be suitable for short-term investment horizons of one to three years. However, some investors may choose to invest in equity funds to achieve their long-term financial goals. Carefully assess your investment objectives and risk tolerance before making a decision.
Short-term capital gains in debt mutual funds are taxed based on the investor’s applicable tax rate, while long-term capital gains from debt funds incur a 20% tax rate with indexation.
