Best Debt Mutual Funds in India 2022 for residents and NRIs

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 NameRisk1 Year ReturnsRatings
Aditya Birla Sun Life Medium Term FundModerate to High24.58%5*
Baroda BNP Paribas Credit Risk Fund Moderately High13.3%5*
UTI Short-term Income FundModerate8.27%5*
UTI Treasury Advantage FundLow to Moderate8.9%5*
HDFC Credit Risk Debt FundModerately High4.1%5*
ICICI Prudential Ultra Short Term FundModerately High4.24%5*
ICICI Prudential All Seasons Bond FundsModerate 3.7%5*
Axis Corporate Debt FundLow to Moderate3.6%5*
SBI Magnum Medium Duration FundModerately High3.0%5*
Aditya Birla Sun Life Short Term Direct FundModerate4.1%5*
Nippon India Short Term FundModerate 3.5%5*
Aditya Birla Sun Life Corporate Bond FundModerate3.1%5*
Nippon India Banking & PSU Debt FundLow to Moderate3.0%5*
Best Debt Mutual Funds in India 2022
Best Debt Mutual Funds in India 2022
Best Debt Mutual Funds in India 2022

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

FundsShort-term capital gain (STCG) taxLong-term capital gain (STCG) tax
DurationDebt fund units sold before 3 years from the date of purchaseDebt fund units are redeemed after 3 years
Debt Funds30%20% with indexation benefits
Debt fund taxability

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. 

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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 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 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. 

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