The Best Debt Funds in India for 2023

India's debt fund market offers a diverse range of investment options that cater to various risk appetite and investment horizons. Whether you are looking for short-term stability or long-term growth, there are several top-performing debt funds in India that can meet your needs. This article provides a comprehensive guide to the leading debt funds, including their key features, performance metrics, and why they stand out in the market.

Banking and PSU Debt Funds

Banking and PSU Debt funds are one of the most popular types of debt funds in India. These funds primarily invest in high-quality securities issued by banks and public sector undertakings (PSUs), offering a blend of lower risk and moderate returns. The Indian Regulatory Framework mandates that at least 80% of the assets be invested in banks, PSUs, and public financial institutions and municipal bonds, with the remaining 20% allocated to high-quality housing finance companies (HFCs), non-banking financial companies (NBFCs), and government securities (G-Secs).

Canara Robeco AMC is a prime example of a Banking and PSU Debt fund, featuring a diversified portfolio that manages liquidity requirements. Investors can earn stable returns, making it a suitable choice for those seeking less volatility.

HDFC Banking and PSU Debt Fund - with an impressive return of 8.8%, this fund also offers a net dividend yield of 0.82%, making it an attractive investment for the short term. Kotak Banking and PSU Debt Fund - this fund clocks in at a 9.0% return, with a net dividend yield of 0.77%, offering a robust risk-adjusted return.

The notable feature of these funds is their minimal risk, thanks to the backing of government-owned entities, which significantly mitigates credit risk. However, it's important to note that even these funds carry minimal risk associated with private banks' papers, which are subject to regulatory oversight and thus pose a low risk.

These funds are generally suited for investors looking for a secure short to medium-term investment horizon. Given their short holding periods ranging from 1 to 3 years, they are not ideal for long-term investments. Investors who plan to invest for 2-3 years can consider these funds, as they provide a balance between safety and returns.

Short-Term Debt Funds

Short-Term Debt Funds, also known as Ultra-Short-Term funds, are designed for investors with liquidity needs within 12 to 18 months. These funds invest in debt instruments with a maturity period of 1-3 years. They offer a higher return compared to liquid funds, making them an excellent choice for those seeking moderate risk and returns over a shorter time frame.

HDFC Short-Term Debt Fund - this fund boasts a robust return of 8.7%, along with a net dividend yield of 0.79%, making it a strong contender in the short-term debt market. ICICI Pru Short Term Fund - with a return of 8.5% and a net dividend yield of 1.14%, this fund is suitable for investors looking to park their money for a brief period without incurring significant risk. SBI Short Term Debt Fund - this fund provides a balanced 8.0% return along with a net dividend yield of 0.84%, offering a prudent investment option for the short term.

Short-Term Debt Funds are particularly attractive to investors seeking stable returns with minimal credit risk. They are well-regulated and offer a good mix of liquidity and returns, making them ideal for investors who need access to funds within a relatively short period of time.

Medium-Term and Long-Term Debt Funds

Medium-Term and Long-Term Debt Funds cater to investors with a longer investment horizon. These funds typically have a portfolio maturity ranging from 3 to 5 years and beyond 5 years, respectively. While they offer the potential for higher returns, they also come with the risk of interest rate fluctuations, commonly known as duration risk.

The interest rate environment plays a crucial role in the performance of these funds. As interest rates rise, the prices of fixed-income securities tend to fall, which can adversely impact the returns of these funds. Conversely, when interest rates fall, the prices of fixed-income securities rise, potentially resulting in greater returns. Thus, investors need to carefully consider their investment timelines and the interest rate environment before opting for these funds.

Liquid Funds

Liquid Funds are among the least risky options within the mutual fund landscape. These funds invest in short-term debt instruments with a maturity period of no more than 91 days. Liquid Funds offer high liquidity, making them an ideal choice for emergency funds or short-term investments that require easy access to funds.

ICICI Pru Liquid Fund - with a return of 5.2% and a net dividend yield of 0.32%, this fund provides a balanced mix of returns and liquidity. It is a popular choice among investors who opt for emergency funds or short-term investments.

HDFC Liquid Fund - this fund offers stable returns with a return of 5.1% and a net dividend yield of 0.30%, making it a reliable option for those seeking a low-risk yet rewarding investment.

Axis Liquid Fund - with a return of 5.2% and a net dividend yield of 0.25%, this fund is a solid choice for investors seeking to park their funds for the short term without incurring significant risk.

Index Liquid Funds, such as ICICI Prudential Liquid ETF and Nippon India ETF Liquid BeES, provide investors with the additional benefit of market indices, offering a broader range of investments.

In conclusion, the best debt funds in India depend on your investment goals, timelines, and risk appetite. Whether you prefer short-term stability, medium-term growth, or long-term returns, there are suitable options within the debt fund category. Careful consideration of each fund's features and performance metrics can help you make an informed decision about your investments.