Top 10 Best Debt Mutual Funds to invest now
Banks have been reducing fixed deposit interest rates in the last 1 year. I wanted to park some surplus money, but scared looking at the Bank FD rates. I have analyzed Top 10 best debt mutual funds which have been giving good returns in last 4-5 years. I thought of sharing them with you too. Which are the top 10 best debt mutual funds to invest now in India? Which are the good debt mutual funds to invest for short term, medium term and long term?
How I picked-up these top 10 best debt funds to invest?
These top 10 debt mutual funds to invest in India have been analyzed and shortlisted based on some of the important parameters.
- These are picked based on highest returns received in the last 5 years.
- Debt mutual funds which are rated as 5-Star (5/5) by value research online.
- Funds, which are rated by Crisil as Rank-1, Rank-2, Rank-3 and Rank-4 which indicates top performance across various market cycles. Two funds have not been rated by Crisil, however, I have considered the same based on other parameters.
- AUM (Assets under management) > Rs 100 Crores. This proves investor confidence among these top 10 mutual funds. As an exception, I have considered one good fund, which has an AUM of Rs 59 Crores.
- Some of the funds might be a repetition from my earlier recommendation.
Also Read: Top 5 Balanced Mutual funds to invest in 2015
Top 10 Best Debt Mutual Funds to invest now
I have separated them as an ultra short term, short term, income funds and gilt mutual funds.
a) Ultra Short Term
Ultra short-term funds invest in fixed-income instruments which are mostly liquid and have short-term maturities within 90 days. These funds offer investors greater protection against interest rate risk than longer-term bonds. An investor who is willing to invest for 3-6 months can invest in these top ultra short term mutual funds. I advise you to invest at least for 6 months to get good returns.
b) Short Term Debt Funds
Short Term funds invest in fixed income instruments which matures in short term of 3 months to 1 year period. An investor who is willing to invest for at least 1 year can invest in these top ultra short term mutual funds.
c) Debt – Income funds
Debt income funds invest in various fixed income options, maturing between medium term to long term and expect regular income from such options. If you are willing to park your money for medium term to long term of 1 to 5 years, you can invest in these funds. Note that these funds does not limit to investing in Govt bonds, but invests in corporate bonds too.
d) Gilt-Medium/Long Term
Gilt Funds are those funds that invest only in government securities. They are preferred by risk averse and conservative investors who wish to invest in the shadow of secure government bonds. Since gilt funds invest only in government bonds, investors are protected from credit risk. Due to fall in interest rates, bond yields have been increasing, hence Gilf funds performed better in last 1 year and gave very high returns.
Also Read: How should you invest lump sum money in Mutual funds?
Conclusion: Instead of worrying about reducing bank FD interest rates, one can look at these best debt mutual funds and start investing based on the period for which an investor want to invest. Gilt funds have been performing better due to fall in interest rates. One may not get such good returns going forward. However, one can expect higher returns compared to bank FD schemes. If you can invest for at least 36 months in income/gilt mutual funds, you can get indexation benefit and tax on such debt funds would be very low.
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Suresh
Top 10 Best Debt Mutual Funds to invest now
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How about Equity Arbitrage funds instead? You would get tax free dividends and tax free capital gains if you redeem after 1 year.
Harsha Gupta, Arbitage funds would provide tax free returns after 1 year. Arbitrage funds has exhausted opportunities and investors are pulling back their money. If one want to invest for 1-3 years, they can choose arbitrage funds as they provide higher post tax returns. However for more than 3 years, debt funds are better.
Hi Suresh,
What is a Debt Mutual Fund? and how does it differ from the other MFs?
Thanks,
Denzil
Denzil, If you refer first paragraph, it gives complete details. These would invest in fixed income opportunities. These would provide returns. On other hand, equity funds invest in stocks. In a year they may provide 50% returns, but next year, they can provide minus 20% returns.
Dear Suresh ,
Thank You for putting up this write up on Debt Mutual Fund , I have been waiting for this as I have in recent past invested in Debt Fund , I am using the Debt Fund to do STP into SIP for the recent SIP I have started the older ones which were started by my MF agent uses Bank Transfer for SIP.
My current Portfolio in Debt MF is mentioned below
HDFC Gilt Fund – Long Term Plan – Direct Plan – Growth Option – 50K ( Debt: Gilt Medium & Long Term )
HDFC High Interest Fund – Dynamic Plan – Direct Plan – Growth Option – 1 Lac ( Debt Income )
HDFC Income Fund – Direct Plan – Growth Option – 1 lac ( Debt Income )
HDFC Liquid Fund – Direct Plan – Growth Option – 2 Lac ( Liquid )
I use the Liquid Fund to do STP to my HDFC SIP i.e HDFC Balanced Fund 2k pm
Also I have invested in ICICI Debt MF
ICICI Prudential Flexible Income – Direct Plan – Growth ( Ultra Short Term Debt ) 40 K
ICICI Prudential Long Term – Direct Plan – Growth ( Debt Income ) 1 Lac
ICICI Prudential Banking & PSU Debt Fund – Direct Plan ( Debt Income ) 1 Lac
From ICICI Debt I use the Ultra Short Term MF to do a STP for 3 SIP I have in ICICI
The Goal is to keep around 12-14 Lacs in Debt Fund which over period of 12-15 years would end up in SIP via STP. I do understand the fact that Debt Fund is not 100 % safe but this is what I managed to do after reading many of your write up and my own little research on subject.
I want to know if this is the right approach as the money I have invested into would be for a period of 10-12 years that would eventually end up in SIP via STP ? Do you think I should change my Debt Portfolio in any way ?
I would also be getting around 14 Lac from my PF which after reading you write up on Income from Fixed Scheme thought would invest in PO MIS Scheme which gives 8.4 % and then using the MIS to RD of PO which gives compound interest rate of similar value and this would end up in long term duration and there is no risk of TDS for POS
But since the PO gives low interest would be be fine if I invest in specific Debt Fund instead of PO and which one would you suggest for long term ?
Thank You for your reply.
Joseph, This is what I keep advicing investors. You can invest in debt funds and do STP to equity funds through SIP. I would advice you to invest in debt funds / bank FD’s instead of PO RD as they give low interest.
Thank You Suresh , Your website has helped me immensely in planning my investment , My Gratitude to you for answering my queries.
My apprehension on bank FD is they do a TDS while in PO MIS/RD I dont have to worry about TDS. While I do understand the low return ( 8.4 % ) for PO MIS/RD scheme.
Is there a comparision that can be done for Bank FD and PO MIS/RD returns for 5 years term taking into account Tax one needs to pay ?
Thank You
Joseph, While TDS is not deducted by post office, you still need to declare and pay income tax as per income tax slab. Now Banks are offering low interest compared to post office. You can check the banks which are offering higher interest rate compared to PO and then invest in them
thank you suresh.
Suresh. Thx. 2 Qs. 1)Given the 3 yr hold limit for ltcg ( even then20% tax but saving grace is indexation available), how to play the tax angle2) what’s the best mode of inv in these funds? Sip or lump sum. Conventional wisdom is put it in lump sum since they don’t fluctuate much. But imagine u put lump sum 5 yrs ago in icici long term, it is showing 10% now for 5 yrs but I am sure that it wd hv dipped or remained below par in some years. Otherwise 19% in 1 yr vs 10% for 5 may not have happened.
Hi Specialist, After 3 years, and after indexation, tax amount would be very low. These are definitely provide good returns compared to bank FD’s. In debt funds, you can invest lump sum or through SIP. What you are seeing is 10% annualised returns in 5 years. Means 10% x 5 years. It is not just 10% in 5 years.