What are Debt Funds?
A mutual fund that invests in fixed income securities is known as debt mutual funds. These funds typically invest in securities such as Treasury Bills, Government Securities, and corporate bonds that are of a varying horizon. These securities typically come with a fixed maturity and offer a fixed interest rate.
The securities in which any debt mutual fund invests have a different credit rating. These ratings are issued by independent rating organizations such as CARE, CRISIL, FITCH, Brickwork, and ICRA. These ratings signify the risk associated with the entity issuing the security. A higher credit rating indicates that the entity is likely to pay interest as well as the principle on the debt security. Debt funds having a higher allocation to higher-rated securities will be less volatile as compared to low-rated securities. Returns generated by a mutual fund comprised of two sources namely – interest income and capital appreciation/depreciation in the value of the security due to changes in market dynamics. Based on the investment horizon and the ability to bear the risk, wide ranges of products are available. Different types of debt mutual funds available are:
a. Dynamic bond funds:
Funds take interest rate calls and have fluctuating average maturity period
b. Income funds:
Funds take on interest rates and invest in securities with different maturities. Typically have an average maturity of 5-6 years.
c. Short-term and ultra short-term debt funds:
Funds investing in instruments with shorter maturities, which range from around a year to 3 years.
d. Liquid funds:
Funds investing in instruments with a maturity of not more than 91 days.
e. Gilt funds:
These are funds that invest in government-backed securities
f. Credit opportunities funds:
These funds don’t invest according to the maturities of debt instruments and seek to earn returns by taking a call on credit risks
Best Debt Funds of 2019
1. Franklin India Low Duration Fund
The fund seeks to offer steady returns by investing in short-term debt instruments such as money market instruments and has outperformed its benchmark and category over the multi-trailing time period. The portfolio is well diversified and comprises of high-quality corporate bonds which account for over three fourth of the portfolio which results in lower standard deviation when compared to category average. The scheme is ranked 1 in credit opportunities sub-category under debt category by CRISIL for the quarter ended December 2017 and is rated five-star by Morningstar. Santosh Kamath and Kunal Agarwal jointly manage the fund since April 2014.
2. L&T Short Term Income Fund
The scheme seeks to generate a return by investing in fixed income and money market securities. With around 50-60 securities, the fund is moderately diversified and comprises of securities with an average rating of AA category. The scheme has generated considerable returns over its benchmark across time period and is ranked 1 in credit opportunities category by CRISIL for the quarter ended December 2017 and is rated five-star by Morningstar. Shriram Ramanathan, Vikas Garg since April 2017, jointly manages the fund.
3. BOI AXA Treasury Advantage
The scheme seeks to generate reasonable returns by investing in debt and money market instruments and has generated higher returns over benchmark over the multi-trailing time period. With around 30-40 securities, the fund is moderately concentrated and comprises of high rated instruments with an average credit rating of AA. The scheme is ranked 3 in Ultrashort-term debt category by CRISIL for the quarter ended December 2017 and is rated five-star by Morningstar. Piyush Baranwal manages the fund since July 2016
4. ICICI Prudential All Seasons Bond Fund (Previously Known as ICICI Prudential Long-term Fund)
The scheme seeks to generate income through investments in debt securities while maintaining a balance of yield, safety, and liquidity. With 40-50 securities, the fund is fairly diversified and comprises of instruments with an average credit rating of AA. The scheme has beaten its benchmark over 3-and 5-years period and is ranked 1 in the gilt scheme category by CRISIL for the quarter ended December 2017 and is rated five-star by Morningstar. Manish Banthia, Anuj Tagra jointly manages the fund since Jan 2015.
5. SBI Magnum Constant Maturity Fund (Previously Known as SBI Magnum Gilt – Short Tem)
The fund provides an opportunity to invest in government securities which are otherwise not available to retail investors. The fund comprises of government-backed securities and other bonds with AAA rating category thus indicating the highest degree of safety. The fund has generated considerable returns within its category and the scheme is ranked 1 in the income scheme category by CRISIL for the quarter ended December 2017 and is rated four-star by Morningstar. The fund is managed by Dinesh Ahuja since Jan 2011.
Top 5 Debt Funds for 2019
| Name of the Fund | 1 Month Return (%) | 3 Month Return (%) | 1 Yr Return (%) | 3 Yr Return (%) | Exit Load |
| Franklin India Low Duration Fund | 1.05 | 3.03 | 9.24 | 9.29 | 0.5% for redemption within 90 days |
| L&T Short Term Income Fund | 0.84 | 2.56 | 7.34 | 8.70 | For units in excess of 10% of the investment,1% will be charged for redemption within 90 days |
| BOI AXA Treasury Advantage | 0.78 | 2.24 | 7.99 | 8.47 | 0 |
| ICICI Prudential All Seasons Bond Fund | 0.45 | 2.80 | 7.11 | 10.26 | 0.25% for redemption within 30 days |
| SBI Magnum Gilt Fund Short Term | -0.48 | 3.74 | 9.38 | 9.49 | 0 |
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