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 best debt mutual funds. Both normal residents as well as NRIs can invest in these funds.
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 2022
Listed below are some of the best debt mutual funds in India based on past performance, risk involved and rating.
| Scheme Name | Risk | 1 Year Returns | Ratings |
|---|---|---|---|
| Aditya Birla Sun Life Medium Term Fund | Moderate to High | 24.58% | 5* |
| Baroda BNP Paribas Credit Risk Fund | Moderately High | 13.3% | 5* |
| UTI Short-term Income Fund | Moderate | 8.27% | 5* |
| UTI Treasury Advantage Fund | Low to Moderate | 8.9% | 5* |
| HDFC Credit Risk Debt Fund | Moderately High | 4.1% | 5* |
| ICICI Prudential Ultra Short Term Fund | Moderately High | 4.24% | 5* |
| ICICI Prudential All Seasons Bond Funds | Moderate | 3.7% | 5* |
| Axis Corporate Debt Fund | Low to Moderate | 3.6% | 5* |
| SBI Magnum Medium Duration Fund | Moderately High | 3.0% | 5* |
| Aditya Birla Sun Life Short Term Direct Fund | Moderate | 4.1% | 5* |
| Nippon India Short Term Fund | Moderate | 3.5% | 5* |
| Aditya Birla Sun Life Corporate Bond Fund | Moderate | 3.1% | 5* |
| Nippon India Banking & PSU Debt Fund | Low to Moderate | 3.0% | 5* |
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Features of debt mutual funds
Following are key features of debt mutual funds for NRIs and local residents.
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
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.
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:
Flexible investment: You can invest in debt funds via SIP or choose to buy units in a lump-sum.
High liquidity: Liquidity is one of the key benefits of fixed income funds is they offer high liquidity. You can redeem the purchased units any time and the money will show in your bank account within a day.
Partial withdrawal allowed: Investors can withdraw partial funds to meet any urgent financial requirements without affecting the rest of the investment.
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.
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
Gains from mutual funds investment are subject to income tax for resident and NRI investors.
Capital gain tax
| Funds | Short-term capital gain (STCG) tax | Long-term capital gain (STCG) tax |
|---|---|---|
| Duration | Debt fund units sold before 3 years from the date of purchase | Debt fund units are redeemed after 3 years |
| Debt Funds | 30% | 20% with indexation benefits |
TDS
- Residents: No applicable for resident investors
- NRIs: Mutual fund investments made by NRIs are subject to TDS deduction in India. TDS will be deducted from your LTCG at 20% for debt and other non-equity funds.
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.
Before investing in Indian market, NRIs must consult market experts to make informed decisions. You can get detailed mutual fund advisory from experts at SBNRI. 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. To ask any questions related to Mutual Funds, click on the button below. Also visit our blog and YouTube channel for more details.
FAQs
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.
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 funds before investing.
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 of time 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 fund, banking and PSU bond funds if your investment horizon is between 1 year and 3 years.
