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Best Debt Mutual funds 2019 : Top 10 Performing Debt Mutual Funds

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Debt Funds are those mutual funds that invest in fixed-income instruments such as treasury bills, corporate bonds, government securities, commercial paper, and other money market instruments. This article on best debt funds covers the following:

1. What are Best Debt Mutual Funds?

Debt funds are mutual funds that invest in fixed interest-earning instruments such as treasury bills and certificate of deposits. The main objective of a debt fund is to accumulate wealth by means of interest income and steady appreciation of the fund value. The underlying securities generate a fixed rate of interest throughout the tenure for which you stay invested in the fund.

The fund manager of a debt fund invests in the underlying securities 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 apt for those investors that are risk-averse and not ready to have equity exposure. Debt funds grow investor’s wealth with little to no risk. Additionally, they would be concerned about regular income as well. Investors usually stay invested in debt funds for a short to 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 savings bank account. Liquid funds will provide higher returns in the range of 7% to 9% in addition to the flexibility of withdrawals at any time just like a 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 earning optimal returns by maintaining a diversified portfolio of various types 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.

c. Risks

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. There’s a 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.

d. Cost

Debt funds charge an expense ratio to manage your investment. The SEBI has mandated the upper limit of expense ratio to be 1.05%.

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.

4. How to Evaluate Best Debt Mutual Funds?

a. Fund Returns

You need to look for consistent returns over long-term say three, five, or 10 years. Choose funds which have outperformed their benchmark and peer funds consistently across different time frames. However, remember to analyse the fund performance, which matches your investment horizon to get relevant 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 10 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 taken.

5. Top 10 Best Debt Mutual Funds in India

While selecting a fund, you need to analyse the fund from a different perspective. 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 shows the top dynamic bond funds in India based on the past five year returns. Investors may choose the funds based on a different investment horizon such as three years or 10 years returns. You may include other criteria like financial ratios as well.

Top Debt Funds

5-year Returns

Edelweiss Government Securities Fund – Regular Plan – GrowthGilt Fund

10.27%

DHFL Pramerica Dynamic Bond Fund – GrowthDynamic Bond Fund

9.58%

Reliance Income Fund – GrowthMedium to Long Duration Fund

8.92%

Aditya Birla Sun Life Floating Rate Fund – Regular Plan – GrowthFloater Fund

8.40%

Axis Banking & PSU Debt Fund – GrowthBanking and PSU Fund

8.36%

*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.