Best Debt Mutual Funds 2020 – Top Performing Debt Funds to invest in India

Best Debt Mutual Funds 2020 - Top Performing Debt Funds in IndiaBest Debt Mutual Funds 2020 – Top Performing Debt Funds to invest in India

Earlier, Debt Funds had been one of the favorite investment options for moderate to low risk takers. However, time has changed. Due to NBFC crisis and default by corporates on the investments done by mutual fund houses, investors are scared to invest in debt mutual fund schemes. However, these can still offer stable returns compared to equity funds if one can analyze and invest in good debt MFs. What are Debt Funds and how they work? Which are the Best Debt Mutual Funds for 2020 investment? Which are the Top Performing Debt Funds to invest in 2020-2021?

Also Read: Best Midcap Mutual Fund Investments for 2020

What are Debt Mutual Funds and how they work?

Let us quickly check debt fund meaning and how they work.

Debt Funds also called income funds invests in fixed income debt instruments, treasury bills, certificate of deposits and corporate bonds. These debt mutual funds would accumulate wealth both in terms of interest + capital appreciation of the underlying instruments.  Based on the objectives of the mutual fund scheme, fund manager would invest in fixed income options of corporates based on the credit ratings by CRISIL, ICRA and CARE Ratings. Corporates typically offer higher interest rates if their credit rating is lower and vice versa. Hence the investment in such corporate debt instruments would purely depend on funds objective and fund manager’s choice. There are two objectives of such funds:

i) Interest Income would provide a regular flow of fixed income. Based on this NAV would increase.

ii) Capital appreciation / depreciation of underlying debt instruments due to increase/decrease in interest rates, which is dynamic as well as depending on the credit rating changes of the corporates in which mutual fund scheme has invested.

What are different types of Debt Funds?

There are several categories of debt funds in India. Investors can invest based on the objectives of the fund:

1) Liquid Mutual Funds – These are mutual funds where an investor can invest for 1 day to 90 day period.

2) Ultra Short Term Funds – These are short term funds where an investor can invest for 3 months to 1 year period.

3) Low Duration Funds – These are low duration short term funds where an investor can invest for 6 months to 1 year period.

4) Short Duration Mutual Funds – These are short term funds where an investor can invest for 1 year to 3 years time frame.

The above are short term mutual funds. Beyond this there are Credit Risk Funds, Dynamic Bond Funds, Gild Funds, Corporate Bond funds, Long Term Funds etc.

Best Debt Mutual Funds 2020 – Top Performing Debt Funds to invest

Here are the list of top 10 best debt mutual funds to invest in 2020 in India.

#1 – HDFC Short Term Debt Fund
#2 – SBI Magnum Medium Duration Fund
#3 – SBI Magnum Income Fund
#4 – ICICI Prudential Long Term Bond Fund
#5 – Edelweiss Banking and PSU Debt Fund
#6 – Aditya Birla Sun Life Banking & PSU Debt Fund
#7 – Kotak Dynamic Bond Fund
#8 – Kotak Corporate Bond Fund – Standard Plan
#9 – IDFC Government Securities Fund – Investment Plan
#10 – Nippon India Gilt Securities Fund

Performance of Top 10 Debt Mutual Funds to invest in 2020

Here are the top performing debt mutual fund schemes with returns from 3 months to 5 year period along with expense ratio and credit rating from value research.

Best Debt Mutual Funds to invest in India in 2020

Things you should know before investing in Debt Funds

Before you jump into investing into these debt MF schemes, one should know a few things.

1) Understand the type of Debt Funds

There are several types of debt fund as sub classification. These are classified into liquid mutual funds, FMPs, dynamic bond funds, short term mutual funds, ultra short term funds, gilt funds, credit opportunity funds, floating rate funds and long term duration funds. One should know the objectives of such funds to understand better about how and where they invest and how it fits an investor portfolio.

2) Risks in debt funds

Though debt funds invest in fixed income options, it does not mean that these are risk free. These debt mutual funds have interest rate risk, credit risk and liquidity risks. Understanding how these risks impact an investor can help you to choose a right fund based on your risk appetite.

3) Debt Funds invests based on tenure/investment horizon

There are debt funds that invests for 1 day to 3 months. There are funds that work well for 6 months to 1 year duration. There are long term debt funds which are good for 1 to 3 years. Understanding the investment horizon of debt funds would help investors to lock their money for such duration and enjoy higher returns.

4) Debt funds work on financial goals

Can you invest in liquid funds for 3 years duration. The answer is no, as it offers lower returns. Understanding how such funds invest based on financial goals would help you to get good returns.

How to choose a debt mutual fund for investment?

Here are the few tips on choosing a good debt mutual fund to invest in 2020.

1) Invest in funds that gave highest return funds in the last 3 to 5 years.

2) Invest in debt funds that has a long standing history in terms of consistent performance.

3) Consider investing in low expense ratio, debt funds which can directly, help you to get higher returns.

4) Compare various mutual fund ratios like Sharpe ratio, beta, alpha and standard deviation for the debt fund. Invest in debt funds that has higher alpha, lower beta and standard deviation.

5) More important, invest in short term mutual funds rather than long term debt-funds as we do not know how corporate credit rating move in the longer term.

Are Debt Funds Tax Free?

Returns from debt funds are not tax free. You need to pay income tax based on STCG and LTCG.

i) Short Term Capital Gains – If the holding period of a debt fund is less than 36 months, then it is categorized as short-term investment and these are taxed as per individual’s tax slab.

ii) Long Term Capital Gains – If the holding period of debt mutual fund is more than 36 months, then it is categorized as a long-term investment and is taxed at 20% with an indexation benefit.

Risks of investing in Debt Mutual Funds

Here are few risks one should consider before investing in debt funds.

1) Credit risk or Default risk: These are measured based on the credit ratings provided by ICRA, CRISIL and CARE, etc., Credit risk in debt funds indicates the chances that a borrower might not pay interest or repay the principal amount on the committed date. Here, the fund manager may not worry about the risk of default, but more on credit ratings. If credit rating is downgraded, the market price of debt instrument would fall and vice versa.

2) Interest Rate Risk: Market price of bonds and interest rates goes opposite. If the interest rate goes up, the bond’s price would go down and vice versa. Hence, if you are holding debt funds and interest rates are going up, you may see fall in the price of bonds which your debt fund might be holding. These fluctuations needs to be considered by investor before investing in such debt funds.

3) There are other risks like Inflation Risks, Reinvestment risks etc., too

FAQs about Debt Mutual Funds

1) Is there any lock-in period for debt mutual funds?

There are several categories of debt funds that can be invested from 1 day to 3 years time frame and beyond. There is no lock-in period in debt funds except in Fixed Maturity Plans (FMPs) which can be redeemed only at maturity. However FMPs can be sold on stock exchanges too.

2) How can I invest in debt mutual funds in India?

Investments in Debt funds can be done like any other equity fund. If you have a mutual fund account, just login to that and select debt fund and place a buy request. You can also invest directly by visiting a mutual fund AMC website and placing a request there.

3) Can debt funds give negative returns?

The recent NBFC crisis has created havoc in stock markets. Many mutual fund schemes are writing-off the payments that are due from corporate due to payment defaults. Hence, debt funds which invests in corporate debt can give negative returns.

4) Among fixed deposit and debt fund, which is better?

Both have its pros and cons. Fixed deposit provides fixed returns on maturity. If you want to break such FD, the interest rates would be reduced. On other hand debt MFs provide higher returns than FD. These are liquid investments. However, debt funds have various risks like interest rate risk, default risk etc.,

You may like: 10 Best SIP Mutual Fund Plans for 2020

5) Is Investing in Liquid Funds Safe?

Liquid mutual funds invests in debt instruments that can be liquidated as fast as 1 day to a few days. Hence the fund manager of liquid fund has to invest in safe investments. Liquid Funds can be considered as safe short term mutual funds as invest in short term instruments.

6) Which are the best debt mutual fund investments for lump sum investments in 2020?

Debt funds do not invest in equity. Hence the debt mutual fund schemes indicated above can be invested in a lump sum.

7) Which are the best debt funds for the long term?

Except for liquid funds, the above are still best debt funds for long term investments.

8) How best debt funds by value research is determined?

Value Research rates funds between 1 star (worst) to 5 stars (outstanding). If you would like to check best debt funds as per value research, you can check for 4 star and 5 star debt funds. The list considered above is in line with Valueresearch recommendation.

Does this answer all your queries on investment in debt mutual funds in India? Give your honest feedback in the comments.

If you enjoyed this article, share it with your friends and colleagues through Facebook and Twitter.

Suresh KP


  1. Suresh Ji,

    My mother have some FDs which is going to mature . Getting (Senior Citizen) 7.5 % interest rate in OBC.

    Can I invest her amount in Nippon India Nivesh Lakshya Fund – Direct Plan – Growth.

    or go with FDs in continuation.

    Munish K. Singh

    1. Hello Munish, My advice is not to invest in single fund or single option. You can try the following 1) Invest in Sr. Citizen Savings Scheme 2) Invest in long duration debt funds (the way you indicated). There are two funds in this category as of now. ICICI Pru Long Term Bond is there for the past 5+ years and consistent performer. You can invest in this. Other fund is Nippon India lakshya fund is 2.5 years old fund, however shown good performance. However one need to check for long term performance.

  2. Hello Suresh,
    What are your thoughts on Axis All Seasons Debt Fund of Funds? Would it be good investment option as it distributes the money across various types of Debt Funds? If possible do a detailed review of the same? Thank you

Leave a Reply

Your email address will not be published. Required fields are marked *