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.
| Scheme Name | Risk | 1 Year Returns | 3 YEAR RETURNS | Rating |
|---|---|---|---|---|
| Aditya Birla Sun Life Medium Term Plan Plan Growth for NRI | Moderately High | 6.69% | 12.48% | 5* |
| Baroda BNP Paribas Credit Risk Fund Growth for NRI | Moderately High | 7.21% | 10.34% | 5* |
| UTI – Treasury Advantage Fund – Plan – Growth Option for NRI | Low to Moderate | 7.20% | 6.86% | 5* |
| Nippon India Corporate Bond Fund Growth for NRI | Moderate | 7.17% | 5.35% | 5* |
| HDFC Credit Risk Debt Fund Growth Option for NRI | Moderately High | 6.73% | 5.67% | 5* |
| ICICI Prudential Ultra Short Term Fund | Moderately High | 6.99% | 5.17% | 5* |
| ICICI Prudential All Seasons Bond Funds | Moderate | 7.51% | 5.40% | 5* |
| Axis Corporate Debt Fund Growth for NRI | Moderate | 6.71% | 4.63% | 5* |
| SBI Magnum Medium Duration Fund Growth for NRI | Moderately High | 7.26% | 4.75% | 5* |
| Aditya Birla Sun Life Short Term Fund Plan Growth for NRI | Moderate | 6.92% | 4.91% | 5* |
| Nippon India Short Term Fund – Growth for NRI | Moderate | 6.77% | 4.75% | 5* |
| Aditya Birla Sun Life Corporate Bond Fund Plan Growth for NRI | Moderate | 7.13% | 5.05% | 5* |
| ICICI Prudential Gilt Fund Growth for NRI | Low to Moderate | 8.17% | 5.10% | 5* |
*Returns as of 7-Jan-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:
- 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 at any time and the money will show up 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 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 Price | 25,00,000 |
| Investment Amount | 15,00,000 |
| 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 331 | 6,74,632 |
| LTCG payable @20% | 1,34,927 |
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 Price | 37,00,000 |
| Investment Amount | 25,00,000 |
| Capital gain (Sale Price – Cost of Investment) | 12,00,000 |
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.
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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 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.
