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Best Debt Funds
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5Yr. Returns

Best Debt Mutual funds : Top 10 Performing Debt Mutual Funds

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Debt Funds are those which allocate unitholders’ money in fixed-income earning instruments i.e. treasury bills, corporate bonds, government securities, commercial paper and other money market instruments. This article covers the following:
  1. What are Debt Funds?
  2. Who should invest in Debt Funds?
  3. Things to consider as an investor
  4. How to evaluate Debt funds?
  5. Top 10 Debt Funds in India
  6. Conclusion

1. What are Debt Funds?

Debt funds are mutual funds which invest your money in a fixed interest earning instruments like treasury bills and certificate of deposits. The main objective to invest in a debt fund is to accumulate wealth by means of interest income and steady appreciation of the fund value. The underlying securities generate interest at a fixed rate throughout the tenure for which you stay invested in the fund.  The fund manager of a debt fund invests in the underlying securities on the basis of their respective credit ratings. A higher credit rating indicates that a debt security has a higher chance of paying interest regularly along with repayment of the principal upon expiry of tenure. Apart from that, the fund manager aligns his investment strategy according to the overall interest rate movements.  

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2. Who should invest in Debt Funds?

Debt funds are chosen by investors who are conservative and who do not wish to take exposure to the equity market. They want to grow their wealth but in a less volatile manner. Additionally, they would be concerned about regular income as well. Investors usually stay invested in debt funds for a short-term and medium-term horizon. You need to choose an appropriate debt fund according to your investment horizon. Liquid funds may be suitable for a short-term investor who usually keeps his surplus funds in a saving bank account. Liquid funds will provide higher returns in the range of 7%-9% in addition to the flexibility of withdrawals at any time just like a saving 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 as compared to 5-year bank FD.   Liquid funds

3. Things to consider as an investor

a. Fund Objectives

Debt Fund aims to earn optimal returns by maintaining a diversified portfolio of various types of securities. You can expect them to perform in a predictable manner. It is because of this reason, that debt funds are popular among conservative investors.

b. Fund Types

Debt funds are further divided into various categories like 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.

c. Risks

Debt funds are basically exposed to interest rate risk, credit risk, and liquidity risk. The fund value may fluctuate due to the overall interest rate movements. There’s a risk of default in the payment of interest and principal by the issuer. Liquidity risk happens when the fund manager is unable to sell the underlying security due to lack of demand.

d. Cost

Debt funds charge an expense ratio to manage your money. Till now SEBI had mandated the upper limit of expense ratio to be 2.25%.

e. Investment Horizon

An investment of 3 months to 1 year would be ideal for liquid funds. If you have a longer horizon of say 2 to 3 years, you may go for short-term bond funds.

f. Financial Goals

Debt funds can be used to achieve a variety of goals like earning additional income or for purpose of liquidity.

4. How to evaluate Debt funds?

a. Fund returns

You need to look for consistent returns over long-term say 3, 5 and 10 years. Choose funds which have outperformed their benchmark and peer funds in a consistent manner across different time frames. However, remember to analyze the fund performance which matches your investment horizon to get relevant results.

b. Fund history

Choose fund houses which have a strong history of consistent performance in the investment domain. Ensure that they have the consistent track record for at least say 5 to 10 years.

c. Expense ratio

It shows how much of your invested amount is being used to manage expenses of the fund. A lower expense ratio means higher take-home returns. Choose a  fund with a lower expense ratio which can give you superior performance.

d. Financial ratios

You can use financial ratios like standard deviation, Sharpe ratio, alpha and beta to analyze 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 taken.  

5. Top 10 Debt Funds in India

While selecting a fund, you need to analyze the fund from different angles. There are various quantitative and qualitative parameters which can be used to arrive at the best debt funds as per your requirements. Additionally, you need to keep your financial goals, risk appetite and investment horizon in mind. The following table represents the top 10 dynamic bond funds in India based on the past 5 year returns. Investors may choose the funds based on a different investment horizon like 3 years or 10 years returns. You may include other criteria like financial ratios as well.
Fund Name
3 year5 year
Aditya Birla Sun Life Medium Term Plan9.13%8.39%
Reliance Credit Risk Fund
Reliance Liquid-Treasury Plan(G)
SBI Magnum Gilt Short Term
Aditya Birla Sun Life Short Term Fund
HDFC Short Term Opportunities Fund
ICICI Pru Flexible Income Plan8.51%7.87%
*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.

6. Conclusion

Many a time 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 go for ClearTax Save. You can invest in hand-picked funds in a hassle free and paperless manner.  

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