Best Debt Mutual Funds in India 2024 for Residents and NRIs/OCIs

Best Debt Mutual Funds in India 2024 for Residents and NRIs/OCIs

Debt funds are a kind of mutual funds that lend money to the government and companies to generate returns. In India, debt funds principally invest in fixed-income securities, including corporate bonds, debentures, treasury bills, commercial paper, etc. Funds that earn fixed interest and involve lower risk than equity funds can be considered the best debt mutual funds. Both normal residents as well as NRIs can invest in these funds. Here is the list of best debt mutual funds in India 2024 for NRIs and residents to invest.

Also read: Best SIP to Invest in 2024 – Top 10 SIP Mutual Fund Plans for NRIs/OCIs

Key takeaways 

  • Investors stay invested in debt funds for a short to medium horizon of 1 day to up to 3 years.
  • After-tax deduction, debt funds offer better returns compared to fixed deposits if you stay invested for at least 3 years. 
  • You can park your emergency funds in liquid debt funds. They offer better returns than savings bank accounts without much risk. 

Best Debt Mutual Funds in India 2024

Listed below are some of the best debt mutual funds in India based on past performance, risk involved, and rating.

Best Debt Mutual Funds in India 2024
*Returns as of 25-June-2024

Also read: Best Equity Mutual Funds for NRIs to Invest in 2024

Features of debt mutual funds

Following are key features of debt mutual funds for NRIs and local residents.

1. Types of debt funds

Debt funds are categorized as follows:

  • Money Market Funds
  • Liquid Funds
  • Banking & PSU Funds
  • Gilt Funds
  • Gilt Funds with 10-year Constant Duration
  • Ultra-Short Duration Funds
  • Low Duration Funds
  • Money Market Funds
  • Overnight funds
  • Short Duration Funds
  • Medium Duration Funds
  • Medium-to-Long Duration Funds
  • Long Duration Funds
  • Corporate Bond Funds
  • Dynamic Funds
  • Credit Risk Funds 

2. Asset allocation

Debt mutual funds invest a significant portion of the corpus in debt and money market instruments, such as treasury bills, government securities, corporate bonds, etc. 

3. Risk-return ratio 

Best debt mutual funds are those funds that offer stable and moderate returns with minimal market risks. However, fixed-income funds are subject to credit risk and inflation risk.

Benefits of debt mutual funds

NRIs and resident investors can enjoy the following benefits by investing in debt mutual funds in India:

  1. Flexible investment: You can invest in debt funds via SIP or choose to buy units in a lump sum. 
  2. High liquidity: Liquidity is one of the key benefits of fixed-income funds is they offer high liquidity. You can redeem the purchased units at any time and the money will show up in your bank account within a day.
  3. Partial withdrawal allowed: Investors can withdraw partial funds to meet any urgent financial requirements without affecting the rest of the investment. 
  4. Tax efficient: Debt funds are more tax efficient as compared to traditional fixed income instruments like bank fixed deposits. Tax is levied on debt funds only when you redeem units and they also offer indexation benefits when sold 3 years after the date of purchase. Where fixed deposits are taxed every year.
  5. Credit rating: In India, debt funds are rated by credit agencies based on their past performance. Hence you can check the credit quality rating of debt funds before investing in these funds. 

Taxability on Debt Mutual Funds

Gains from mutual funds investment are subject to income tax for resident and NRI investors. 

Capital gain tax

The debt mutual fund tax has been changed with effect from April 1, 2023, after the Budget 2023 brought certain amendments. Debt mutual funds will no longer be allowed to avail of indexation benefits from FY 23-24. Any gains made on debt mutual funds investment will now attract taxation on applicable slab rates of the investor’s income bracket.

How does new taxation on Debt Mutual Funds work?

Let’s take the following example for clarification and compare the old taxation vis-à-vis new taxation.

Example: Mr Raghav invested Rs 15,00,000 in FY 2017-18 in debt mutual funds. He sold the same after holding it for three years in FY 22-23. Here’s a comparison of his taxation pre-amendment and new rules.

Sale Price25,00,000
Investment Amount15,00,000
Indexed cost of Investment (Investment*331/272)18,25,368 (rounded off)
Long-term capital gain (Sale Price – Indexed Cost of Investment)Note: CII for 2017-18 was 272 and CII for 2022-23 was 3316,74,632
LTCG payable @20%1,34,927
Debt Mutual Fund Taxation before Budget 2023 Amendment

Now let’s take a present-day case for comparison:

Example: Mr Raghav invested Rs 25,00,000 in debt mutual funds in FY 23-24 and sold the same in FY 27-28 for Rs 37,00,000. Basis new mutual fund taxation 2023, here’s how it will taxed:

Sale Price37,00,000
Investment Amount25,00,000
Capital gain (Sale Price – Cost of Investment)12,00,000
Debt Mutual Fund Taxation after Budget 2023 Amendment

Note: Your capital gains will be part of your income for the said FY when you sell the debt mutual fund and accumulate the capital gains. This will then be taxed as per your income slab rates for the year.

Relief from double taxation

Mutual funds are one of the best options for NRI investment in India. India has signed the DTAA (Double Taxation Avoidance Agreement) with more than 90 countries. As per the agreement, NRIs have to pay tax in only one country. This means if they have already paid taxes on their mutual fund gains in India, they are not required to pay tax for the same in the country of your residence.

Invest in Debt Mutual Fund with SBNRI

Before investing in the Indian market, NRIs must consult market experts to make informed decisions. You can download SBNRI App from the Google Play Store or App Store to ask any questions related to mutual fund investment, NRI account opening online and tax filing in India.

NRIs willing to invest in mutual funds in India can download SBNRI App to choose from 3000+ mutual fund schemes or to ask any questions related to mutual fund investment. Also visit our blog and YouTube channel for more details. 

SBNRI is an authorised Mutual Fund Distributor platform & registered with Association of Mutual Funds in India (AMFI). ARN No. 246671

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. SBNRI does not intend to predict future returns, please read all related documents before investing.

FAQs

What is a debt fund?

Debt funds are mutual funds that predominantly lend money to the government and private companies to generate returns. For example, banking and PSU funds lend money to banks and public sector companies only.

Is there any risk on debt funds?

There are debt funds with zero or negligible risk, for example, overnight and liquid funds. However, there are debt fund categories that involve some amount of risk. Hence, you must check your funds before investing.

Which debt fund is the best?

The best debt fund depends on your investment goal. You can invest in overnight or liquid funds if you want to invest for a very short period ranging from 1 day to 1 month. Money market funds will be suitable for investors whose investment horizon is between 6 months and 1 year. You can opt for corporate bond funds, banking, and PSU bond funds if your investment horizon is between 1 year and 3 years. 

What is the taxation on debt mutual funds?

The debt mutual fund tax has been changed with effect from April 1, 2023, after the Budget 2023 brought certain amendments. Debt mutual funds will no longer be allowed to avail of indexation benefits from FY 23-24. Any gains made on debt mutual funds investment will now attract taxation on applicable slab rates of the investor’s income bracket.

Is debt funds safe to invest in?

Debt funds are a kind of mutual funds that lend money to the government and companies to generate returns. In India, debt funds principally invest in fixed-income securities, including corporate bonds, debentures, treasury bills, commercial paper, etc. This makes it a relatively safer investment option.

What is Debt funds vs. Equity Funds?

Debt funds are mutual funds that invest money into fixed-income securities, corporate bonds, treasury bills, commercial papers, and more. On the other hand equity funds invest the money into stocks/shares of the company.

Is debt funds safer than equity funds?

Debt funds invest in fixed-income securities, corporate bonds, treasury bills, commercial papers, and more while equity funds invest in stocks/shares of the company. This makes debt funds a relatively safer option as an investment than equity funds.

Which is the best debt mutual fund of 2024?

Aditya Birla Sun Life Medium Term Plan Growth for NRI is the best-performing debt mutual fund of 2024 with a return of 6.69% for 1 year and 12.48% for 3 years.

Can NRIs invest in Debt mutual funds?

Yes, NRIs can invest in debt mutual funds with ease after completing their mutual fund KYC and linking their NRO/NRE bank account to the KYC.

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