Debt mutual funds
predominantly invest in fixed-income instruments such as treasury bills, corporate bonds, government securities, and other money market instruments. This article on best debt funds covers the following:
1. What are Best Debt Mutual Funds?
Debt mutual funds majorly invest in fixed interest-earning instruments such as treasury bills and certificate of deposits. The main intention of these funds is to generate wealth in the form of interest income and steady appreciation of the capital invested. The underlying assets generate a fixed rate of interest over the tenure for which investors stay invested in the fund.
A debt fund manager invests predominantly in the underlying assets based on their respective credit ratings. A higher credit rating indicates that debt security has a higher chance of paying interest regularly along with the repayment of the principal upon expiry of the investment tenure. Apart from that, the fund manager aligns his investment strategy as per the overall interest rate movements.
2. Who Should Invest in Best Debt Mutual Funds?
Debt funds are suitable for risk-averse or for those who are not ready to have equity exposure. Debt funds grow investors’ wealth with little to no risk. Additionally, these funds strive to provide regular income. Investors usually stay invested in debt funds for a short to medium-term horizon. You need to choose an appropriate debt fund as per your investment horizon.
Liquid funds may be suitable for a short-term investor who generally parks his or her surplus funds in a savings bank account. Liquid funds provide returns in the range of 7-9%. They also offer flexibility in terms of withdrawals at any time, just like a regular savings bank account. If you need to ride the interest rate volatility, then dynamic bond funds may be an ideal option. These funds are suitable for a medium-term investment horizon to earn higher returns than a 5-year bank FD.
3. Things to Consider as an Investor
a. Fund Objectives
Debt funds aim at optimising returns by diversifying the portfolio by investing across a variety of securities. You can expect them to perform predictably. It is because of this reason that debt funds are accessible among conservative investors.
b. Fund Category
Debt funds are further classified under various categories such as liquid funds, monthly income plans (MIPs), fixed maturity plans (FMPs), dynamic bond funds, income funds, credit opportunities funds, GILT funds, short-term funds, and ultra short-term funds.
Debt funds are subject to interest rate risk, credit risk, and liquidity risk. The fund value may fluctuate due to the movement in the overall interest rates. These funds take up the risk of default in the payment of interest and principal by the issuer. Liquidity risk is seen when the fund manager is not able to sell the underlying security due to lack of demand.
Debt funds charge an expense ratio to manage your investment. No fund house can charge above the limit set by the Securities and Exchange Board of India (SEBI).
e. Investment Horizon
An investment horizon of three months to one year is ideal for liquid funds. If you have a longer horizon of say two to three years, then you can explore short-term bond funds.
f. Financial Goals
Debt funds can be used to achieve a variety of goals such as earning additional income or for liquidity and earning much higher returns than a regular savings bank account.
4. How to Evaluate Best Debt Mutual Funds?
a. Fund Returns
It would help if you looked for consistency in returns over long-term, say three, five, or ten years. Choose funds that have outperformed the benchmark and peer funds consistently across different time frames. However, remember to analyse the fund performance, which matches your investment horizon to get results.
b. Fund History
Choose fund houses that have a strong history of consistent performance in the investment domain. Ensure that they have a consistent track record of at least say five to ten years.
c. Expense Ratio
It shows how much of your investment goes towards managing the fund. A lower expense ratio translates into a higher take-home return. Choose a fund which has a lower expense ratio and has the potential to give you superior performance.
d. Financial Ratios
You can use financial ratios such as standard deviation, Sharpe ratio, alpha, and beta, to analyse a fund. A fund having, higher standard deviation, and beta are riskier than a fund with lower beta and standard deviation. Look for funds with a higher Sharpe ratio, which means it gives higher returns on every additional unit of risk being taken.
5. Top 10 Best Debt Mutual Funds in India
While selecting a fund, you need to analyse the fund from various perspectives. Different quantitative and qualitative parameters can be used to arrive at the best debt funds as per your requirements. Additionally, it would help if you keep your financial goals, risk appetite, and investment horizon in mind. The following table shows the top bond funds in India based on the past three year returns. Investors may choose funds based on a different investment horizon such as five or ten years returns. You may include other criteria like financial ratios as well.
*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.
Many times, investing in debt funds becomes complex. In case you don’t possess enough financial knowledge and are finding it too difficult to understand, then just reach out to us. We offer handpicked funds from experts.