Debt Mutual Funds

Debt Funds invest the pooled corpus from various investors into securities with fixed income. The securities have a fixed interest rate and maturity tenure. Learn about the basics of the low-risk Debt Mutual Funds in India to become a sophisticated investor.

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At times when a company or any other entity needs fund-raising, it gathers voluntary contribution from individuals, businesses, etc. The company or entity which is accepting the funds, issue security or promise to return regular interest to the borrower for a fixed tenure. But for an individual, it might be a tough task to buy the expensive securities of larger entities and gain their benefits. This is where debt mutual funds get the upper hand.

1. What are Debt Funds?2. Top Performing Debt Mutual Funds3. What are Debt Instruments?4. How Does Debt Mutual Funds Work?5. Benefits of Investing in Best Debt Mutual Funds6. Sub Categories of Debt Mutual Funds7. Tips for Investing in Debt Funds8. SIP or Lumpsum. Which is Better for Debt Funds?9. Who Should Invest in Debt Mutual Funds10. FAQ on Debt Funds

What are Debt Funds?

Debt instruments work in a similar way as lending money to someone who will pay regular interest. The fund manager of a debt mutual funds invests the corpus in the fixed income securities which generate regular income. The aim is to deliver regular returns to the investors by investing the pooled corpus from numerous investors in securities that ensure fixed income. These securities are cited as fixed income because the interest rate and the maturity tenure of these instruments are pre-defined.

Top Debt Funds To Invest In 2019

Following are the best debt funds from various categories which have been selected by the research team at MySIPonline after a comprehensive analysis of multi-level parameters. Investors can choose from the list of best debt funds in India for 2019 according to the suitability of the fund.


What are Debt Instruments?

Debt instruments or debt tools are the securities used by debt mutual funds to achieve their respective objectives. Every type of debt tool has different maturity period, have different quality or risk, and deliver different returns. Many types of debt instruments are used by the fund managers of debt funds. Some of the most common tools have been described below:

  • Corporate Bonds : These are the debt securities issued by companies of either public sector or private sector. Corporate bonds are sold to the investors for a fixed tenure and the face value of the bond is paid back to the buyer after the maturity period. Until the maturity period is completed, the issuer of the corporate bond pays regular fixed interest based on pre-decided rates to the buyer. In some cases, the physical assets of the corporate bodies are used as collateral for bonds. Buyer can also sell a corporate bond before maturity. If the issuer fails to pay interest or the principal amount, the buyer won’t receive capital gains. This is the only risk associated with corporate bonds.
  • Government Securities : Government securities or government bonds are issued by the government in return of funds that are used for the welfare of the national economy. These securities either deliver fixed returns which include principal as well as interest after a fixed tenure or can also provide fixed interest at a regular interval along with the repayment of principal amount after the maturity tenure. Government securities are less risky as they are backed up by the taxation law of government and have fewer chances to default. The interest rates of these securities affect the economy of the nation.
  • Treasury Bills : These are the short term debt security which is issued by the government of India for short term borrowing. Treasury bills or T-bills have a maturity period of less than 1 year. In India, T-bills are of 91, 182, and 364 days. These are auctioned at regular intervals by Reserve Bank of India. The issuing price of T bills are lower than maturity price and the buyer gets the face value along with the interest as maturity amount. This debt security has a negligible risk factor.
  • Commercial Paper : These are the short term loans taken by corporate bodies to meet the short term liabilities. The maturity tenure of a commercial paper can be anywhere between 7 days to 365 days in India. The issuer of the commercial paper pays back face value along with the pre-defined interest rates. The risk factor of a commercial paper depends on the ratings of the issuer however quite a few cases of defaulting have been witnessed since 1990.
  • Certificates of Deposit (CD) : In this money market instrument, banks or financial institutions permitted by the RBI issue a certificate of deposit at a discount price on face value. After the maturity tenure, the certificate of deposit is sold at a face value. Hence, the discount price is the profit booked by the investor after a fixed tenure. The minimum and maximum maturity tenure for banks are 7 days and 1 year respectively. For the financial institutions, maturity tenure ranges from 1 year to 3 years.
  • Debenture : It is a debt instrument issued by the corporation or government, generally of long term in which there is no collateral or security for the amount borrowed. It is unsecured debt tool which possesses higher risk than other instruments. The maturity of the debentures is generally of the long term which can range up to 20 years.

How Does Debt Mutual Funds Work?

Debt funds invest the pooled corpus from the investors into a mix of fixed income securities. Every investor is allotted fix number of units for every investment based on the prevailing NAV. Every instrument used by the fund manager has different “credit ratings” and maturity tenure. The credit ratings define the quality of the instrument. Lower the ratings higher are the chances that the issuer will default in returning the promised interest or the principal amount. When the fund receives the interest or face value bought at a discount price, the NAV of a debt funds grows. If due to some reason the issuer is unable to pay back the interest, the NAV might get low. However, the losses in the debt mutual funds are rare. Profit or loss can occur based on the prevailing rates of the NAV at the time of transactions.

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Benefits of Investing in Best Debt Funds

Apart from gaining capital appreciation at low risk, there are several other benefits of investing in best debt mutual funds.

  • Volatility in Equity Market Cannot Affect the Investments.
    Debt funds invest in the securities with fixed income like treasury bills, G-secs, bonds, debentures, and money market instruments. These instruments have no effect on the equity market condition. The investments can prosper even if the equity market is falling.
  • Portfolio Gets Stable
    The volatility in the portfolio of the investor can be reduced to a great extent if a debt scheme is added to the portfolio. It adds stable gains even if the equity schemes drag the returns downwards in a portfolio. Hence a balanced portfolio with equity and debt funds is less likely to face volatility.
  • Withdraw Whenever You Want To
    All the debt funds are open-ended and most of them charge no exit load. Investors can withdraw the required amount anytime. Some debt schemes also offer the facility of ATM card through which withdrawals can be done instantly.
  • Better Alternative of Bank Accounts
    Debt Mutual Funds are a much better alternative of the bank deposits and FDs or RDs. Keeping the cash in regular bank deposits provide 4% annual gains while the debt funds for short duration say liquid fund, offer 7-9% annual gains which is much higher. In FDs and RDs, redemption is not allowed anytime while the debt funds are open-ended.

Sub Categories of Best Debt Mutual Funds

Securities and Exchange Board of India (SEBI) has categorised the best debt mutual funds in India into 16 sub-categories based on the quality of securities used and the maturity tenure of the instruments. Investors can choose the most suitable category to achieve his/her financial goal from the following list of 16 debt mutual funds sub-categories.

  1. Overnight Funds : 

    It is the category of debt mutual funds which invests in the securities that mature on the next business day. At the start of each working day, the entire AUM becomes cash which is then invested on the same day to mature in one day. If the interest rates changes overnight then it will be applicable on the next working day. These funds possess negligible credit default risk. Overnight funds do not have a lock-in period or exit load.
  2. Liquid Funds : 

    It is the most popular category of debt mutual funds. The securities of a liquid fund get mature within 91 days. These funds generally invest in government securities and treasury bills of high credit ratings and low risk. Liquid funds can be chosen to park the surplus cash which is not needed for a while. It is a much beneficial alternative of regular bank deposits. Liquid funds have no lock-in period and exit load.
  3. Ultra Short Duration Funds : 

    In this category of debt funds, the corpus can be invested in securities which have short term maturity. The maturity tenure can range from 1 week to 18 months however in general, it ranges from 1 to 9 months. The credit ratings of the securities can also vary depending on the strategy of the fund manager. These funds are open-ended and charge no exit load.
  4. Low Duration Funds : 

    These are the debt mutual funds in which the securities can be of any credit ratings but the maturity tenure of the instruments must be between 6 to 12 months.
  5. Money Market Funds : 

    Funds under this category are only allowed to invest the corpus in the money market instruments like treasury bills, commercial papers, certificates of deposits etc. The maturity of the instruments must be less than a year. The credit ratings of the securities in money market funds are high.
  6. Short Duration Funds :

    Mutual Fund Schemes of this category mainly invest the corpus in bonds of higher credit ratings. The maturity tenure of the instruments in short duration fund ranges from 1 to 3 year.
  7. Medium Duration Funds :

    Mutual Fund Schemes of this category have a portfolio of debt instruments with varying credit ratings and maturity duration ranges from 3-4 years.
  8. Medium to Long Duration Funds :

    The securities chosen by the funds under this category have a wide range of maturity tenure which can range from 4 to 7 years. The credit ratings of the instruments are generally moderate to low.
  9. Long Duration Funds : 

    The portfolio of these funds comprises of instruments with maturity tenure of more than 7 years. These funds are suitable for long term investors and have no lock-in period.
  10. Dynamic Bond Funds :

    This category of debt funds invests in the securities with different maturity tenure from short to long duration. This allows investors to take advantage of the changing interest rates in the rising and falling market conditions. During the falling market, the fund manager can dynamically increase the allocation in the securities with long term maturity, similarly the rising market can be well utilised by investing in securities of short term maturity. These funds have no lock-in period.
  11. Corporate Bond Funds :

    This category of debt mutual funds invests in corporate bonds of higher credit ratings. These funds are bound to invest at least 80% of the corpus in corporate bonds of high credit ratings.
  12. Credit Risk Funds :

    In this category, a minimum of 65% of the corpus is invested in corporate bonds which have credit ratings below the highest rated corporate bond. These funds possess higher risk as corporate bonds of lower credit ratings have high credit default risk.
  13. Banking and PSU Funds :

    In this category of debt mutual funds, a minimum 80% of the corpus is allocated in debt instruments of banks, PSUs, and public financial institutions. The securities under this category can have a diverse credit rating.
  14. Gilt Funds :

    Under this category, 80% of the corpus must be invested in government securities. The G-secs have a low risk as they are backed up by the taxation power of government and hence these funds possess negligible risk.
  15. Gilt with 10-year Duration :

    Funds under this category are also considered as gilt fund but the maturity tenure of the securities must be more than or equal to 10 years. At least 80% of the corpus must be invested in government securities with maturity tenure of more than 10 years.
  16. Floater Funds :

    This category of mutual fund invests in the floating rate instruments in which the interest rates are no fixed and can vary. A floater fund needs to invest more than 65% of the corpus in floating rate instruments.

Tips for Investing in Best Debt Funds in India

  1. Volatility Exists : Debt schemes are less volatile as they invest in securities which provide fixed incomes. Investors must note that it is not risk-free. There can be a credit default risk due to which sometimes the interest is not paid regularly and NAV can fall. It is a rare incident and has no effect in the long term investment.
  2. Do not Expect High Returns : Debt Funds provide limited returns as per the interest rates of the instruments chosen by the fund manager. Investors must not expect higher returns from a debt funds.
  3. Charges and Fee : Most of the debt mutual funds do not charge exit load but this does not mean investment and redemption are free of cost. The AMC which is offering the fund charges an expense load which is however much lower than the equity schemes. Investors must check the expense ratio before investing.
  4. Selection of the Fund : To select the best debt funds for oneself, investors must be certain of the investment tenure and the returns that are needed to achieve a pre-decided investment objective.
  5. Returns are Taxable : The returns from a debt fund are taxable according to the STCG and LTCG. The short term capital gain is applicable in debt funds if the investment is accumulated for less than 3 years.
  6. Regular Monitoring is Necessary : It is essential to regularly check the portfolio and take a necessary decision if the financial goal does not look within reach. A better decision can also be made by keeping a check on the interest rate regime.
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SIP or Lumpsum. Which is Better for Debt Mutual Funds?

Debt mutual funds allow investments through SIP as well as lumpsum. However, in the debt funds, the NAV grows regularly as the risk associated is quite lower hence lumpsum can be a better mode to invest as interest rates will be applicable on more units if the investment is done at one go. Although, investing through SIP can restrict the financial burden on the investor but units will be purchased in instalments and some units will gain higher returns than others. SIP is considered a better option in equity mutual funds but in a low-risk fund, lumpsum investment can be more beneficial. If a debt scheme has high risk, SIP is more likely to be a better investment mode.

Who Should Invest in Debt Funds?

Debt mutual funds have a low-risk portfolio and are less prone to volatility. These funds are most suitable for conservative investors to gain capital appreciation. Debt funds are most suitable for every kind of investor whose investment tenure is less than 3 years. It is an optimum alternative to bank deposits or FDs as the returns are much higher. Debt mutual funds can also be used to park the surplus cash as a lumpsum as it can be risky to invest a higher amount in equities. The option of STP can also be chosen to invest the corpus periodically from a debt funds to equity funds.

FAQ on Debt Funds

  1. What is the minimum and maximum limit to invest in a debt mutual funds?

    The investment in a debt mutual funds can be started from Rs 500. There is no limit on the maximum investment amount.
  2. What time is taken by debt funds to reflect the redeemed amount in my bank?

    If a request to redeem the units is made before 3 PM on a working day, the amount will be reflected to the bank account within next 1-2 working days based on NAV of that day. If a request is made after 3 PM, the NAV of the next day will be applicable.
  3. Can I save tax through debt mutual funds?

    No. Only ELSS mutual funds can reduce tax liability under section 80C.
  4. How are debt mutual funds regulated?

    Debt as well as equity or any other category of mutual funds are regulated by the Securities and Exchange Board of India (SEBI).
  5. Should I choose a single debt fund or more than one?

    Debt funds are less risky and hence diversifying the investments in debt mutual fund is not necessary. However, more than one fund can be chosen if risk needs to be reduced further but only if it favours the investment objective.
  6. Can I know where the debt funds is investing?

    Debt mutual funds have to disclose their portfolio on a regular basis. Some AMCs send the portfolio to the investors on a monthly basis through the registered e-mail. The portfolio of any fund can be checked online anytime.
  7. Are debt mutual funds risk-free?

    Debt funds invest in securities with fixed income and are less risky compared to equity schemes. However if the issuer of the security is unable to pay the interest rate or the principal amount due to some reason, the security gets defaulted. The credit default risk exists in every debt fund.
  8. How to select a better debt funds?

    To select a better debt fund for oneself, the investor must check the volatility, performance, fund manager, investment strategy, portfolio, risk factor etc, and compare it with other schemes of the category. Every aspect of the fund must be in line with the investment objective of the investor. One can also take the assistance of a financial expert regarding the selection of the fund.
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