Top performing Debt Mutual Funds

The stock markets are at an attractive low right now, but nobody is certain if this is the lowest they will ever be. Everyone was shocked by the 2008 stock market crash’s suddenness and severity.

In the current market environment, it is recommended to continue making investments in reliable, high-performing mutual funds, such as debt funds, which are less volatile than equity funds, during the decline of the equity market.

Many investors allocate a certain percentage of their funds to debt funds to absorb the volatility of equity funds on the overall portfolio. Though these have been touted to give higher than “term deposit” of fixed deposits as they are commonly known, not all debt funds have delivered higher than term deposit returns over the last few years.

Let’s check about top performing Debt Funds based on 5 years return and stable Credit Rating under different categories of Debt Mutual Funds.

Credit risk fund

Credit Risk Mutual Funds are debt funds that invest in debt securities of low credit grade. Considering that they invest in subpar products, these funds have higher risks.

Interest rates for securities with poor credit tend to be higher. Instruments having a credit rating below AA are often seen to pose a greater credit risk. The portfolio managers of Credit Risk Funds also select assets that might improve in grade (as per their analysis). This can directly impact the NAV of the fund. Credit risk funds have a track record of offering about 3% higher returns than other classes of debt funds.

List of top credit risk mutual fund based on Past Return-

Past years return analysis offers a great idea of expected returns from the scheme, though this is not a sure way to predict the returns. To cover the extra risks associated with credit risk schemes, net yields of credit risk funds should be greater than those of corporate bond funds (those that invest 80% or more of their assets in assets with ratings of AA+ and above). Although above mentioned debt schemes offered better returns than the category average annualised return of 3.6 %.

Dynamic bond funds

Dynamic Bond Funds are debt mutual funds that invest in debt and money market securities such as corporate and government bonds and others with varying maturities. Regarding the tenure or maturity of the securities they invest in, these funds are unrestricted. Depending on their expectation for interest rates, the fund managers make investments across periods. Although dynamic bond funds tend to be more volatile than short-term and medium-term debt funds, they have the potential to deliver greater returns over long term investment horizons.

List of Top Credit Risk Debt Mutual Funds based on Past Return-

Mutual Fund Name	1 Year Return	3 Years Return	5 Years Return
ICICI Prudential All Seasons Bond Fund	3.9 %	7.6 %	7.4%
TATA Dynamic Bond Fund	5.0 %	6.8 %	6.3 %
HDFC Credit Risk Debt Fund	1.4 %	7.0 %	5.2 %

ICICI Prudential All seasons Bond Fund has performed slightly better than the annualised category average return of the last 5 years. Tata Dynamic Bond Fund and HDFC Credit Risk gave lower return than average category return i.e. 7%.

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Long duration debt fund

Long-term debt funds are those that make 5-year or longer loans to reputable businesses. Due to the loan’s duration, the investment is intrinsically riskier than other debt funds since it is more or less exposed to the full economic cycle. These schemes frequently offer practically similar rates to bank fixed deposits with similar terms, but they come with a larger risk.

List of Top Long Duration Debt Mutual Funds based on Past Return-

Mutual Fund Name	1 Year Return	3 Years Return	5 Years Return
ICICI Prudential Long Term Bond Fund	0.1 %	4.2 %	6.0%
Nippon India Nivesh Lakshya Fund	1.8 %	3.8 %	8.6 %

These two above-mentioned funds in the Long Duration Debt Fund category performed well, Although, There are not so many options available with a stable Fund Ratings in this category.

Short duration debt fund

Debt funds known as short-term funds make loans to businesses for one to three years. These funds typically only invest in reputable businesses with a track record of making on-time loan repayments and enough operating cash flow to support the borrowing. For money that you won’t need for at least 12 to 18 months, they are ideal. While limiting risk, these funds often offer higher returns than bank fixed deposits.

Top 3 Short Duration Debt Mutual Funds based on Past Return-

Mutual Fund Name	1 Year Return	3 Years Return	5 Years Return
Aditya Birla Sun Life Short Term Fund	4.3 %	7.3 %	7.4%
UTI Short Term Income Fund	8.3 %	8.6 %	5.2 %
Nippon India Short Term Fund	3.7 %	7.1 %	7.0 %

The category average 5 years annualised return under Short duration Debt Fund is 6.4%. Aditya Birla Sun Life Short Term Fund and Nippon India Short Term Fund have performed better than category average than UTI Short term Income Fund.

Summing Up

One method may be to select a debt fund that offers better returns, but there are other things to take into account. Before investing in a debt fund, you should determine your goals, risk tolerance, and investment horizon. Credit Risk Funds, which invest in assets with poor ratings, may be chosen by aggressive investors. While taking on more credit risk, these funds produce substantially better returns. Investments in corporate bond funds, which invest in high-quality securities, can help risk-averse investors build wealth.

In debt funds, there are tax benefits too. A three-year minimum holding period is required for short-term capital gains. In debt mutual funds, short-term capital gains are taxed at the investor’s appropriate tax rate if the units are sold before three years have passed. As a result, the short-term capital gains tax on borrowed funds is 30 % plus a 4 % cess if your tax rate is 30 %. Long term capital gains of debt funds are taxed at 20% with indexation.

Additionally, liquid assets are the best short-term bets for building an emergency fund. Choose between a low duration fund and an extremely short duration fund if your investment horizon is up to one year. Long-term and medium-term investment funds may be used to build wealth for long-term investors.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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