Debt Mutual Fund is one of the best investment options. Debt funds invest in debt instruments such as corporate bonds, commercial papers, government securities, treasury bills, etc. Looking at the current market scenario debt mutual funds are best for investment.
There are multiple types of debt mutual funds available in the market, based on your risk appetite and time horizon you can select appropriate debt fund. If you have high-risk appetite you can go for credit risk funds or gilt funds. These funds are likely to deliver higher returns compared to other funds. These types of funds are suitable for medium-term 3-5 years. If you have a moderate risk appetite, you can opt for dynamic bond funds, corporate bond funds, and Banking & PSU debt funds. These types of funds usually deliver moderate returns. If your risk appetite is very low and safety is the topmost priority for you, I would suggest you go for ultra-short, liquid, and overnight funds. The returns from these types of funds is low.
In this post, I will be sharing some of the best performing debt mutual funds. I will also share features of debt funds and the benefits of investing in debt funds.
Debt Mutual Fund Features
Optimal Returns
Debt mutual funds invest in debt instruments. You can expect optimal returns from the debt mutual fund. The returns offered by debt funds are somewhat predictable. Debt funds are safer and hence preferred by conservative investors.
Diversified Investment
Debt mutual funds invest in multiple instruments such as corporate bonds, commercial papers, government security, etc. This means your investment is diversified and you will get good returns along with safety.
Specific Duration
All debt funds are offered with a specific time duration. The duration is starting from 1 day to 10 years. This is because debt fund invests in debt instrument with a fixed maturity period.
Underlying debt securities are rated for credit quality
Debt funds invest in fixed income instruments and are rated for credit quality. These fixed income instruments are rated by credit agencies. It is advisable to select funds that invest in AAA-rated fixed income securities.
Taxability
Long term capital gain tax is applicable to the debt fund. It is at the rate of 20% after indexation. Debt funds are also subject to short term capital gain tax. It is taxable as per tax slab applicable on your income.
Also Read – Top Debt Free Companies in India for Investment
Best Debt Mutual Fund to Invest in 2020
DSP Government Securities Fund
DSP Government Securities Fund is one of the best debt funds for investment. This fund has 99% investment in the government securities. As majority of investment is made in the government securities, this fund is considered as safe for investment. This fund is suitable for the longer duration. CRISIL ranking of this fund is 5 star.
| Returns | 1 – Year Returns | 3 – Year Returns | 5 – Year Returns |
| Fund | 12.28% | 9.39% | 10.11% |
SBI Magnum Medium Duration
SBI Magnum Medium Duration fund is next in the list of best debt fund. This fund is suitable for medium term. This fund has very low expense ratio. CRISIL ranking of this fund is 4 star. This fund invests in government securities as well as very low risk securities.
| Returns | 1 – Year Returns | 3 – Year Returns | 5 – Year Returns |
| Fund | 12.04% | 8.92% | 9.46% |
ICICI Prudential Credit Risk Fund – Growth
ICICI Prudential Credit Risk Fund is moderate risk longer duration credit risk fund. This fund invests in government securities and very low risk securities. CRISIL ranking of this fund is 5 Star.
| Returns | 1 – Year Returns | 3 – Year Returns | 5 – Year Returns |
| Fund | 10.14% | 7.95% | 8.38% |
L&T Ultra Short Term Fund – Growth
L&T Ultra Short Term Fund is one of the best debt fund in short term category. This fund is suitable for investors who want to invest for very short term or investors that are looking for alternatives to bank accounts and deposits. This fund invests very little in the government securities say around 3%. Other investment is made in very low risk securities.
| Returns | 1 – Year Returns | 3 – Year Returns | 5 – Year Returns |
| Fund | 7.04% | 7.22% | 7.56% |
Franklin India Liquid Fund
Franklin India Liquid Fund is one of the best debt funds. This fund has very low expense ratio. CRISIL ranking of this fund is four star. This fund invests in government securities and other low risk securities.
| Returns | 1 – Year Returns | 3 – Year Returns | 5 – Year Returns |
| Fund | 5.68% | 6.75% | 7.06% |
Note – Above returns are as on 17th July,2020.
Benefits of Investing in Debt Mutual Funds
Debt funds offer multiple benefits to investors. A few of them are given below.
(1) Debt funds are liquid. This means investors can withdraw money anytime. No penalty is applicable to the redemption debt mutual funds. You can also make a partial withdrawal.
(2) Debt funds are relatively safe as they invest in high rated fixed income instruments. you can expect moderate returns from this fund.
(3) Debt funds are more tax-efficient compared to other similar investment options. If you hold this fund for a longer duration you will enjoy more tax benefits. No TDS is applicable on the debt funds.
(4) There are multiple debt fund types available in the market. You can select the fund based on your risk appetite.
(5) Debt funds are flexible. You can invest via the SIP route or you can invest lump sum amount also.
(6) The returns of the funds are based on underlying securities and applicable interest rates. Over the long term, you can expect 12% returns from the debt fund.
Over to you
Do you invest in Debt Mutual Funds? Do share your recommended funds in the comment section given below.
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