Top 5 Best Debt Funds 2018 to invest in India

What are Debt Funds?

Mutual funds are formally categorized by the asset class of investments they own. Some mutual funds only own stocks. Some mutual funds only own bonds. The former are called as equity funds and the latter are bond funds or fixed income funds or debt funds.
Debt funds are funds that invest in “debt instruments”, which include government securities, corporate bonds and money market instruments. Debt funds usually invest in fixed income instruments which may also offer capital appreciation. Debt funds also give capital appreciation and Regular Income.

The primary way of categorizing mutual fund products is on the basis of the asset class in which the scheme will invest. Some of them are:
1. Equity funds.
2. Debt funds.
3. Hybrid funds.
4. Gold funds.

A Debt Mutual Funds or Debt Funds is an investment, similar to other Mutual Funds or other traded Funds in which the core parts include the fixed income instruments like Treasury Bills, Government Securities, and Corporate Bonds. A debt mutual fund invests in securitized products, money market instruments, short-term or long term bonds. The debt fund is also known as credit fund or fixed income fund.

Why to invest in Debt Funds?

Debt funds are chosen by those who are looking for steady income with relatively lower risks, as it’s comparatively less volatile than equities. In other words, debt funds are more preferred than equities because the risk is low. Debt funds are preferred by individuals who are not willing to invest in a highly volatile equity market. Debt mutual funds also help to provide tax efficient regular cash flows via systematic withdrawal plans or SWPs.

Since these funds invests in fixed income securities, debt funds offer better safety on long term basis along with better returns. Debt funds are a vital component of a well-diversified portfolio as their returns are typically more stable (less volatile) than equity funds. Thus, diversifying nature of debt funds reduces the overall portfolio risk.

What are the types of Debt Funds?

There are broadly seven types of debt mutual funds in India. They are:

1. Gilt Funds: These funds invest only in government securities, known as bonds that are issued by the Government of India. The returns of these funds are highly prone to interest rates up and downs. The NAV (Net Asset Value) of gilt funds can be extremely volatile. The primary function of Gilt Funds is capital appreciation i.e. (increase in the price or value of assets). Investors with moderate to high risk tolerance level, looking for capital appreciation, can go with Gilt Funds.

2. Liquid Funds: They are also known as money market mutual funds. The main objective of liquid funds is easy liquidity and preservation of capital providing investors an opportunity to earn returns, without compromising on the liquidity of the investment. These schemes invest in short-term instruments like Treasury Bills, term deposits, inter-bank call money market and Commercial Papers and are meant for an investment period of one day to three months. Liquid funds give higher returns than savings bank. Unlike savings bank interest, no tax is deducted at source for liquid fund returns. Withdrawals from liquid funds are processed within 24 hours on business days. Liquid funds are suitable for investors who have substantial amount of cash in their savings bank account.

3. Fixed Maturity Plans: Fixed Maturity Plans (FMPs) are close ended. In other words investors can subscribe to this scheme only during the offer period. The tenure of the scheme is fixed. These plans are chosen by the investors who are likely to reduce or prevent re-investment risk. Since the bonds in the FMP portfolio are held till maturity, the returns of FMPs are very stable. The investors usually remain invested till the end of the tenure and thus the liquidity of these funds is low. FMPs are considered for investors with low risk tolerance, looking for stable returns and tax advantage over an investment period of 3 years or more. They can provide better post tax returns than bank fixed deposits and are attractive investment options when yield rate is high.

4. Short-term funds and Ultra-Short term funds: Short-term funds invest mostly in debt securities with an average maturity of one year to three years. They are suitable for investors who go with low to moderate risk. They usually invest in money market instruments like Commercial Papers (CP), Certificate of Deposits (CD) and short maturity bonds. Ultra short-term funds invest in securities with a maturity period of not more than one year. These funds are suitable for investors who are ready to take a marginally higher risk for slightly higher returns.

5. Income funds: Income funds invest in a variety of fixed income securities such as corporate bonds, debentures and government securities, across different maturity profiles with an average maturity of 4.5 years or more. Therefore, these funds are also highly sensitive to interest rate movements. However, the interest rate sensitivity of income funds is less than gilt funds. They are suitable for investors who are ready to take high risk and have a long-term investment plan.

6. Monthly Income Plans: Monthly income plans are debt oriented balanced mutual funds. These funds invest 75 – 80% of their portfolio in fixed income securities and the 20 – 25% in equities. Monthly income plans may generate higher returns from pure debt funds. However, the risk is also slightly higher in monthly income plans compared to other types.

7. Credit Opportunities Funds: These funds invest majorly in corporate bonds and debentures of varying maturities. The average maturities of the bonds in the portfolio of credit opportunities funds are in the range of 2 – 3 years. The fund managers hold the bonds to maturity and so there is very little interest rate risk. Credit Opportunities funds are suitable for investors with low to moderate risk tolerance.

Are Debt Funds are tax free?

Currently, the minimum tenure for long-term capital gains (LTCG) was extended from one to three years. This means that investors will have to remain invested for at least three years in debt funds if they want the benefit of lower tax on long-term capital gains. If redeemed/used within three years or lesser i.e. short-term capital gains (STCG), the gains will be added to the person’s income and taxed as per the applicable income tax slab structure.
However, if the investor can hold for more than three years i.e. LTCG, a debt fund will be taxed at 20% after indexation. Indexation (it allows you to inflate the purchase price using cost Inflation Index) takes into account inflation during the period that the investment is held by investor and accordingly adjusts the purchasing price which can lower the capital gains tax significantly.
Another tax-friendly feature of debt funds is that there is no tax deduction at source (TDS) on the gains.

Capital gains tax:
Capital gains tax is a tax that is charged on the profits that he/she has made by selling his/her capital asset. In other words, it is a tax imposed on profits earned. For making it easy for taxation, the capital assets are classified to ‘Short-Term Capital Asset; and ‘Long-Term Capital Asset’.
Short-Term Capital Asset: If the shares and securities are held by the taxpayer for a period not more than 36 months preceding the date of its transfer will be treated as a short-term capital asset.
Long- Term Capital Assets: If the taxpayer holds the shares and securities for a period exceeding 36 months before the transfer will be treated as a long-term capital asset.
Short-Term Capital Gains Tax (STCG):
If a capital asset (stocks, bonds, land, residential property etc.) is sold within 36 months from the date of acquisition, profits from the sale are termed as short term capital gain.
Short Term Capital Gain = Sale Consideration – (Cost of Acquisition + Cost of Improvement + Cost of Transfer).
Long-Term Capital Gains Tax (LTCG):
If the capital asset (stocks, bonds, land, residential property etc.) is sold after 36 months from the date of acquisition, profits from the sale are termed as long term capital gain.
Long Term Capital Gain = Sale Consideration – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer + Exemptions).

Summary – Top 5 Best Debt Funds 2018 to invest in India

Debt Short term Funds:

S.No:Fund NameRanking Source1yr

Return %

3yr

Return %

5yr

Return %

1HDFC Short term OpportunitiesMoneycontrol.com

&

Morningstar.com

6.88.1
2UTI Banking & PSU Debt-RegularMoneycontrol.com6.88.8
3Baroda Pioneer Short Term Bond FundValueresearch.com7.068.428.53

 

4Franklin India Low Duration FundValueresearch.com8.349.209.46
5

Franklin India Short term Income Plan- Retail Plan

Valueresearch.com8.628.589.27

 

 

Debt Ultra-Short term Funds:

S.No:Fund NameRanking Source1yr

Return %

3yr

Return %

5yr

Return %

1SBI Ultra Short Term Debt-RPMoneycontrol.com6.87.7
2BOI AXA Treasury Advantage Fund-Regular PlanValueresearch.com7.608.508.78

 

3Franklin India Ultra Short Bond Fund- Super Institutional PlanValueresearch.com

&

Morningstar.com

8.159.099.47
4

L&T Floating Rate Fund

Valueresearch.com7.558.338.41

 

 

 

Debt: Gilt Medium & Long Term Funds:

S.No:Fund NameRanking Source1yr

Return %

3yr

Return %

5yr

Return %

1Reliance Gilt Sec- RPMoneycontrol.com6.18.7
2SBI Magnum Gilt-LTPMoneycontrol.com

&

Valueresearch.com

4.958.4010.24

 

Debt: Credit Opportunities Funds:

S.No:Fund NameRanking Source1yr

Return %

3yr

Return %

5yr

Return %

1Franklin Low DurationMoneycontrol.com8.39.2

Debt Income Funds:

S.No:Fund NameRanking Source1yr

Return %

3yr

Return %

5yr

Return %

1ICICI Pru Advisor Series- Dynamic Accrual PlanValueresearch.com7.039.339.15
2SBI Regular Savings FundValueresearch.com7.148.9810.04

 

Debt Liquid Funds:

S.No:Fund NameRanking Source1yr

Return %

3yr

Return %

5yr

Return %

1Essel Liquid Fund- RegValueresearch.com6.837.488.22

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