Debt funds are mutual funds that invest in fixed-income securities like treasury bills, corporate bonds, government securities, and other debt and money market instruments. These are considered safer than equity funds because they provide regular income and have lower risk. This makes debt funds a good choice for conservative investors who want stability and stable returns. There are different types of debt funds, such as liquid funds, gilt funds, and corporate bond funds, and all with varying levels of risk and return, catering to different investment goals. Let’s learn about the debt funds types in Indian markets for NRIs/OCIs and residents.
Understanding Debt Funds for NRIs
Let’s say you have ₹1,00,000 that you want to invest safely for a year. Instead of keeping it in a regular savings account, you choose a debt fund, specifically a short-term debt fund. This fund invests in government bonds and high-quality corporate bonds that mature within one year. Over the year, the fund generates returns from the interest on these bonds. That means, if the debt fund gives a return of 7% by the end of the year, your investment would grow to ₹1,07,000. Ideally, this way, your money earns more compared to a typical savings account, with relatively low-risk factors.
Also read: Best Debt Mutual Funds in India 2024 for Residents and NRIs/OCIs
Key Takeaways of Debt Funds
- 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.
Also read: Best SIP to Invest in 2024 – Top 10 SIP Mutual Fund Plans for NRIs/OCIs
Types of Debt Funds in India
- Short-Term Funds: Short-term funds invest in government bonds and safe debt instruments with a maturity period of 1 to 3 years. They are perfect for people who want to invest for 9 to 12 months with low to moderate risk.
- Ultra Short-Term Funds: These are mostly in very short-term bonds with a maturity period of less than a year. They are perfect for those looking to invest for 1 to 12 months with low risk.
- Income Funds: This type of Investing in government and corporate bonds with a maturity period of around 5 to 6 years. They are best for people willing to invest for a longer time (5-6 years) and can handle a bit more risk.
- Liquid Funds: These are very safe and short-term instruments like Treasury Bills and CDs with a maturity period of 91 days (about 3 months). They are perfect for those who need their money back quickly and want very low risk.
- Dynamic Bond Funds: Dynamic bond funds change between long-term and short-term investments based on changing interest rates. They invest in various debt and money market instruments. These funds are suitable for those with a medium to high-risk tolerance who want to adapt to changing interest rates.
- Gilt Funds: Gilt funds invest only in securities issued by central and state governments. They typically have medium to long-term maturity periods. Since they are government-backed, there is no credit risk, meaning your capital is safe. However, they can still be affected by changes in interest rates. Gilt funds are best for those willing to invest long-term and prefer the security of government-backed options
- Fixed Maturity Plans (FMPs): These have a set lock-in period ranging from months to years. They are not affected by changing interest rates due to the fixed period, keeping the Net Asset Value (NAV) stable. FMPs are close-ended and tax-efficient, making them a good alternative to fixed deposits.
- Credit Opportunities Funds: These funds invest in various debt instruments to maximize profits. These investments can range from short-term to long-term and usually come with higher returns but also higher risk. They are suitable for investors looking for higher returns and willing to accept some risk.
Also read: 𝗕𝗲𝘀𝘁 𝗠𝘂𝘁𝘂𝗮𝗹 𝗙𝘂𝗻𝗱𝘀 for NRI in India 2024
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 | 7.26% | 12.52% | 5* |
| Baroda BNP Paribas Credit Risk Fund Growth for NRI | Moderately High | 7.42% | 9.01% | 5* |
| UTI – Treasury Advantage Fund – Plan – Growth Option for NRI | Low to Moderate | 7.22% | 7.46% | 5* |
| Nippon India Corporate Bond Fund Growth for NRI | Moderate | 7.20% | 5.96% | 5* |
| HDFC Credit Risk Debt Fund Growth Option for NRI | Moderately High | 7.17% | 5.82% | 5* |
| ICICI Prudential Ultra Short Term Fund | Moderately High | 7.22% | 5.72% | 5* |
| ICICI Prudential All Seasons Bond Funds | Moderate | 7.51% | 5.40% | 5* |
| Axis Corporate Debt Fund Growth for NRI | Moderate | 7.43% | 6.02% | 5* |
| SBI Magnum Medium Duration Fund Growth for NRI | Moderately High | 7.02% | 5.60% | 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 | 7.04% | 5.65% | 5* |
| Aditya Birla Sun Life Corporate Bond Fund Plan Growth for NRI | Moderate | 7.60% | 5.85% | 5* |
| ICICI Prudential Gilt Fund Growth for NRI | Low to Moderate | 7.89% | 6.18% | 5* |
*Returns as of 25-June-2024
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 on Debt Mutual Fund
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.
Also read: NRI Mutual Fund Taxation in India 2024 Explained
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 |
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 Price | 37,00,000 |
| Investment Amount | 25,00,000 |
| 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.
Also read: Best NRI Investments in India: Top 10 Investment Options for NRIs/OCIs in India 2024
Wrapping up
Debt funds are a popular, low-risk investment option providing stability and flexibility to investors. There are various types, such as short-term, ultra short-term, income, liquid, dynamic bond, gilt, fixed maturity plans, and credit opportunities funds, each suited for different risk tolerance and investment horizons. Short-term and liquid funds are ideal for low-risk, short-term needs, while dynamic bond and credit opportunities funds suit those seeking higher returns with moderate risk. Choosing the right debt fund depends on your financial goals and risk tolerance and it is very important to choose the right one for your financial future.
Invest in Debt Mutual Fund with SBNRI
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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
Which debt fund gives the highest return?
Aditya Birla Sun Life Dynamic Bond Retail Fund gives the highest return with 8% after a year, followed by UTI Ultra Short Duration Fund with 7.5%.
Which mutual fund is best for NRIs in India?
The best mutual fund for NRI in India are:
- SBI Equity Fund.
- ICICI Pru Credit Risk Fund.
- Parag Parikh Long-Term Equity Fund.
- UTI Nifty Index Fund.
What is the best way to invest money in India for NRI?
Fixed Deposits (FDs) are popular with both resident and non-resident Indians (NRIs). They are considered very safe investments since banks rarely default on them. NRIs can open FDs through their:
- FCNR
- NRO
- NRE accounts
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.
