Which are Top and Best Debt Mutual Funds to invest in 2018 to invest? How to shortlist among the many categories and again within same categories many funds? Let us shortlist the funds based on our requirement.
Note:-Refer our latest post related to recent changes in types of debt funds “Types of Debt Funds in India -After SEBI Categorization“.
Before proceeding further, let us recap the returns of last year funds which I recommended in 2017.
Have you noticed one thing?? Returns of Income Funds, Dynamic Funds, and Credit Opp Funds are around same of Ultra Short Term Debt Funds and Short Term Debt Funds since a year. Also, the Long Term Gilt Funds returns since a year tumbling to 4.60% and 1.31%.
The reason is slowly higher inflation and RBI’s monetary policy halted slashing of interest rate. Hence, the effect is high on long-term debt funds rather than short-term debt funds.
Hence, I always advocate for Ultra Short Term, Short Term or Short Term Gilt in debt fund category.
Before proceeding further, let us understand the basics of investment. I am repeating this again and again for the benefits of all investors. I repeated this in my earlier post of “Top 10 Best SIP Mutual Funds to invest in India in 2018“.
Before a BLIND investment, it is always best that you must know the reason for your investment. Hence, before jumping into investment read what I am sharing below.
I noticed that many of investors simply invest in mutual funds just they have some surplus money. The second reason may be someone guided that mutual funds are best in long run compared to Bank FDs, PPF, RDs, or even LIC endowment product.
If you have clarity like why you are investing, when you need money and how much you need money at that time, then you will get the better clarity in selecting the product. Hence, first identify your financial goals.
You must know the current cost of that particular goal. Along with that, you must also know the inflation rate associated with that particular goal. Remember that each financial goal to have it’s own inflation rate. For example, education or marriage cost of your kid’s is different inflation that the inflation rate of household expenses.
By identifying the current cost, time horizon and inflation rate of that particular goal, you can easily find out the future cost of that goal. This future cost of the goal is your target amount.
I have written a separate post on how to set your financial goals. Read the same at “Financial Goals – How to set before jumping into investing?”
Next step is to identify the asset allocation. Whether it is short-term goal or long-term goal, the proper asset allocation between debt and equity is a must. I personally prefer the below asset allocation. Remember that it may differ from individual to individual. However, the basic idea of asset allocation is to protect your money and smoothly sail to reach the financial goals.
If the goal is below 5 years-Don’t touch equity product. Use the debt products of your choice like FDs, RDs or Debt Funds.
If the goal is 5 years to 10 years-Allocate debt:equity in the ratio of 40:60.
If the goal is more than 10 years-Allocate debt:equity in the ratio of 30:70.
While choosing debt product, make sure that the maturity period of the product must match your financial goals. For example, PPF is best debt product. However, it must match your financial goals. If the PPF maturity period is 13 years and your goal is 10 years, then you will fall short of meeting your financial goals.
Next and the biggest step is the return expectation from each asset class. For equity, you can expect around 10% to 12% return. For debt, you can expect around 7% return expectation.
When your expectations are defined, then there is less probability of deviating or taking knee-jerk reactions to the volatility.
Once you understand how much is your return expectation from each asset class, then the next step is to identify the return expectation from the portfolio.
Let us say you defined the asset allocation of debt:equity as 30:70. Return expectation from debt is 7% and equity is 10%, then the overall portfolio return expectation is as below.
(70% x 10%) + (30% x 7%)=9.1%.
Once the goals are defined with target amount, asset allocations is done, return expectation from each asset class is defined, then the final step is to identify the amount to invest each month.
There are two ways to do. One is constant monthly SIP throughout the goal period. Second is increasing some fixed % each year up to the goal period. Decide which suits best to you.
Hope the above information will give you clarity before jumping into equity mutual fund products.
How many mutual funds do we have? Is it 1, 3, 5 or more than 5? The answer is simple…you don’t need more than 3-4 funds for investing in mutual funds. Whether your investment is Rs.1,000 a month or Rs.1 lakh a month. With the maximum of 3-4 funds, you can easily create a diversified equity portfolio.
Having more fund does not give you enough diversification. Instead, in many cases, it may create you portfolio overlapping and leads to underperformance.
There are basically two reasons to it. The first one is that your goal is too short in nature (like less than 5 years). Hence, you can’t enter into equity mutual funds.
The second important reason for investing is to diversify your investment in other asset class as per the time horizon of your goal. Hence, you invest part of your investment in debt funds as a diversification and also to make sure that the volatility in equity market be subdued in debt.
Hence, I always go for Short-Term, Ultra Short Term or Short Term Gilt rather than Income Funds, Dynamic Funds or Long Term Gilt Funds.
Debt Mutual Funds invest in treasury bills, government securities, Certificate of Deposits (CDs), Commercial Papers (CPs), bonds, money market instruments and many more. The credit quality of these underlying instruments are measured in terms of ratings.
Usually higher the ratings leads to lower the return or risk. It is a misconception among many that credit risk refers to risk of default by the bond issuing entity. However, the truth is something different.
There is a possibility that the credit rating of a bond or instrument the fund is holding may change at any point of time. Let us say ABC Debt Fund holding the bond of XYZ which is rated as AAA by credit rating agencies (highest rating).
It does not mean that this rating is permanent. It may change at any point of time if the company XYZ’s finance changes.
Hence, never be in a misconception that credit rating refers to default risk and also credit rating of bond will NEVER CHANGE.
It is a measurement of a bond’s sensitivity to movements in interest rates. It is usually measured in years. For example, if debt mutual fund with the modified duration of 3.1% means if there is a 1% interest rate movement then the fund will undergo the movement of 3.1%.
Hence, higher the modified duration means higher the interest rate risk.
A debt fund portfolio usually consists of a number of bonds where each could have a different maturity date. Maturity is the time period remaining before which a bond comes up for repayment by the issuer. Average maturity is simply the weighted average time left up to the maturity of the various bonds in a portfolio.
Higher the average maturity greater the interest rate risk of a debt fund.
Some category of funds will charge you exit load. Hence, you have to be careful while selecting the funds and the conditions apply regarding the load structure.
Remember that Equity Funds and Debt funds are taxed differently. Hence, you must understand the taxation part as well before jumping into investment. I tried to explain the same in below image.
The rate of taxation is as below for the current FY.
Also, the current DDT rates for Mutual Funds is explained in below chart.
Hope taxation part is clear to all of you. If you still have doubt, then refer my latest post “Budget 2018 – Mutual Fund Taxation FY 2018-19“.
My first priority should be safety and less volatility. As I said above, we look for debt funds first to diversify our asset and second to have sufficient non-volatile asset class.
Hence, considering these two points I am going to select. The main criteria in my mind are lower the credit risk, modified duration, and average maturity.
Those who want to time the interest rate movements or taking advantage of RISK by investing in corporate debt funds or other volatile risk funds can do so. I selected few funds for them too.
Again I am pointing here that the funds I selected are not final and BEST. These funds are selected based on my own assumptions. It does not mean that they must be BEST for you also.
Excluding Liquid Funds (for which I usually write a separate post), I will cover all other types of debt funds categories in this post.
ltra Short Term Debt Funds are safest after liquid funds. Usually, these funds invest in instruments which mature from 3 months to the maximum of 3 years. But I found that many Ultra Short Term Debt Funds invest in less than a year average maturity instruments.
Below are my top and best Ultra Short Term Debt Mutual Funds.
You notice that this year I discontinued Birla Sunlife Floating Rate Fund-Long Term Plan but moved to Franklin India Savings Plus Fund. The reason is I found Frankin India Savings Plus Fund little bit attractive in terms of low modified duration and low average maturity but best return generated since a year.
However, those who invested already in Birla Sunlife Floating Rate Fund-Long Term Plan can continue the fund without any worry.
These are the next level of debt funds. Usually, short-term debt funds invest in the instruments which mature from 6 months to 6 years. Hence, they are riskier than liquid and ultra short-term debt funds.
Below is the list of my short-term debt funds.
You notice that I removed both the earlier funds which are Birla Sunlife Short Term Fund and Escorts Short Term Debt Funds. The reason to move from Birla fund is that I found IDFC best in terms of bit risk-taking (higher modified duration and higher average maturity to Birla Fund. But the portfolio is equally safe like Birla Fund.
It does not mean Birla Short Term Fund is not good and immediately switch to IDFC. I still support that fund.
Regarding choosing UTI Banking and PSU Debt Fund rather than Escorts Short Term Debt Fund is that the UTI Fund constitute safe bet (high-quality underlying portfolio) and less risk with a high return than the Escorts Funds.
These are the funds which invest in Government of India Bonds which mature from 2 years to 5 years. There are very fewer funds in this category. But I prefer these are best funds over the Short Term Debt Mutual Funds. Because the credit risk and credit ranking risk is not there in such funds.
You noticed that I retained the same old funds in this category. Hence, you can continue who are already investing in these funds.
Income funds invest in corporate bonds, government bonds, and money market instruments. However, they carry the highest risk to the changes in interest rates and are suitable for investors who have the higher risk-taking ability.
Usually, those who track interest rate movements will try to invest in such funds. Personally, I avoid such funds as I want peace of mind not interested in tracking news items. The CORRECT time to invest in these funds is when the market view is that interest rates have touched their peak and are poised to reduce. I am neither aware of those who time the interest rate movements CORRECTLY nor bother to such time-based investment.
The average maturity of such funds ranges from few months to around 17 years. Hence, be cautious while selecting such funds.
Still, I am listing the funds by scrutinizing the minimal risk basis.
In this category also, I retained the same old funds. If you compare the average maturity of the funds from last years to today, you notice that it reduced. This shows that Fund Manager is of view that holding short-term debt papers in slightly higher inflation and PAUSE stance by RBI is best.
These funds primarily invest in medium to long-term Government Bonds. Hence, default risk and credit rating risk is minimal. However, considering their longest average maturity values, these funds prone to highest interest rate volatility.
In this category, I have added UTI Gilt Fund and removed the last year recommendation of L&T Gilt Fund. Because I found UTI Fund performing well than L&T Fund consistently.
Dynamic Bond Funds invest in debt securities of different maturity profiles. These funds are actively managed and the portfolio varies dynamically according to the interest rate view of the fund managers. These funds invest across all classes of debt and money market instruments with no cap or floor on maturity, duration or instrument type concentration.
Considering the nature of the fund, it is hard for an individual to track which debt securities the fund is holding. However, as the fund is actively managed, you may assume the next interest rate trend.
As currently, the trend is that interest rate is as of now PAUSED, hence these funds may move to short-term debt papers.
Have you noticed one thing? The expense ratio of dynamic bond funds to other types of bonds? It is high because they have to churn the portfolio frequently based on the interest rate movement.
I have retained the same funds which I recommended last year.
They are Debt Mutual Funds. Credit opportunities funds adopt the accrual strategy to provide the better return. They take the credit risk for the sake of generating high yield. Usually, they invest in low credit rated funds like less than or equal to “AA” rated. Lower the credit rate leads to higher the return.
Refer the full details about such funds in my earlier post at “What are Credit Opportunities Funds?“.
In this category also, I retained the same funds. If you look at other types of funds, you noticed that they have given handsome returns, but at the cost of quality of papers. Hence, I restricted myself to the same funds.
It is the misconception among many of us that Debt Mutual Funds are safe and we treat these products like Bank FDs or PPF. But in reality, you check above fund categories and notice how the modified duration and average maturity change from Ultra Short Term Debt Fund to Long Term Gilt Fund or Credit Opportunities Funds.
Along with interest rate volatility, the risk of credit rate downgrade or default is always there. Hence, I purpose selected AAA rated funds for my selection.
This is one more myth. Because the experts who recommend it feel debt funds are SAFE. However, these funds also carry the variety of risks. Hence, if your goal is 5 years, then the average maturity must be around 1-2 years of a fund.
Reson behind this is if the NAV falls due to any risk involved in the fund it may get time to bounce back.
It is hard for common man to track the interest rate movements and investing based on the call. Hence, never do such things. Instead, the priority should be to reach your financial goal safely.
Few believe that if currently the bond instrument is rated as AAA, it will remain same forever. It is not like that. Based on the financial health of bond, the rating may change. Hence, never be in wrong belief that ratings are constant.
Hope this much information is enough to understand how debt mutual fund works. My main intention is to educate about debt funds rather than providing you readymade tips of funds.I purposely avoided FMP as they are closed ended in nature. I also avoided debt-oriented balanced fund as I felt they are not necessary when we can actively manage debt and equity separately.
This is the list of my Top and Best Debt Mutual Funds to invest in 2018. It does not mean they are the funds which are ONLY BEST in industry. But as per me, they are best.
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View Comments
Considering the current market scenario, what are the debt funds worth investing in a lumpsum considering the following:
1) timeframe = 10 years
2) Medium risk appetite
Dear Bhattacharya,
EPF, PPF, Liquid Funds, Bank FDs.
Basu Sir,
I am 33 M and currently have 30L as FD matured. I am planning to purchase an Flat within an year or two. So, I need to park this amount and need to have handy when required. So, planning to go with Franklin Ultra Short Bond Growth. Do you think this bond is safer for short term investment of 1 - 2 years ?
Your advice is very much appreciated. Thank you.
Dear Balaji,
Stay away from these and either keep in Bank FDs or invest in Liquid Funds like Quantum Liquid Fund.
Thanks for your valuable feedback Basu sir.
Eagerly waiting for your current recommendations on debt funds and FMP's
Dear SB,
I am more comfortable with Liquid Funds and that too who invest in Government Securities than any other categories of debt funds. Huge risk and that too we may say more than equity.
UTI Banking and PSU Debt Fund has not been performing good for last one year. should we switch to other safer fund ( if yes then which one ?) or not. What is your advice ?
It would be good if you write a blog on the current situation of some debt funds (like credit risk funds) and what should investors do in this situation.
Dear Laxmikant,
Yes, surely I will come up with an article on the Debt crisis. Yes, UTI fund is not performing well. Better to switch to Liquid Funds.
Dear Basu sir,
We are eagerly waiting for your post Top and Best Debt Mutual Funds to invest in 2019.
Dear Rajneesh,
I will soon write on this :) May before the new year itself.
Hi Basu,
For debt allocation, which one would be better: Liquid Funds or Ultra Short-term Debt Funds?
Thanks in advance.
Dear Mahesh,
Both are fine for me.
Dear Basu Sir - I have come across a couple of Mutual funds as NFO.
2 Questions. What is the difference between Open Ended & Close Ended?
Will these funds perform well with return at least 10% PA if I hold for 5+ years with initial investment of a Lakh in each.
1) ICICI Prudential Manufacture in India Fund (Open Ended)
2) Reliance India Opportunities Fund – Series A (Close Ended)
Dear Balaji,
Close eneded funds are open for investment only for a certain period and after that you can't invest. Whereas the open eneded funds can be invested at any point of time. Stay away from NFOs.
Thank you sir. I will probably keep out of NFO's then.
1) So, can I invest the lump sum amount of 2 Lakh into any of these funds as a one-time? If yes, kindly suggest the split for one time investment in these funds.
2) Planning to invest 15K per month in Equity-based SIPs and 5K in FD / PPF / NCDs. For the 15K kindly pick the best funds from below and how much I can split into them. Planned to continue the SIP investment for 10 to 20 years from now.
ICICI Pru Bluechip Fund - D (G) - LargeCap
Axis Bluechip Fund - D (G) - LargeCap
Reliance Large Cap Fund - Direct (G) - LargeCap
ICICI Pru Technology Fund - D (G) - Sectorial
Tata Digital India Fund - Direct (G) - Sectorial
Axis Mid Cap Fund - Direct (G) - MidCap
HDFC Small Cap Fund - Direct (G) - SmallCap
Reliance Small Cap - Direct (G) - SmallCap
Sundaram Equity Hybrid Fund - D (G) - HybridFund
Dear Balaji,
First do the asset allocation between debt and equity based on your time horizon, then accordingly choose the funds in different asset classes. Avoid sector funds. Rest left with you.
Dear Basavraj,
Thanks for putting up some really useful information on your blogs.
I was searching for the SBI Magnum Gilt Fund - Short Term Plan. It has now be renamed to - SBI Magnum Constant Maturity Fund (earlier known as SBI Magnum Gilt Fund - Short Term
Plan).
But the average maturity mentioned on the SID (mentioned below) of the fund is different from the one mentioned on your blog.
Type of Scheme An open-ended Debt Scheme investing in government securities having a constant maturity
of around 10 years
Could you please help reassess if this is still a good fund for an investment horizon of 6 years with the intent of keeping risk low to moderately low.
Thanks,
Amit
Dear Amit,
May be the fund portfolio changed. However, considering the maturity of 10 years, then I suggest to avoid.
Thanks Basavraj.
Request you to please suggest an equally good alternative.
Dear Amit,
MY views are already available in the above post.
Dear Basavraj,
Thanks for the response.
I want to make a lump-sum investment in mutual funds for the time horizon of 6 years. I am targeting 9% to 11% of returns keeping the risk to be moderate.
Could you please suggest the correct category of mutual funds for such an investment. I can then select the ones you've recommended for that category.
Thanks
Dear Amit,
Moderate return expectation 9% to 11%? I consider long term aggressive return expectation of around 10.5% (considering 30:70 in debt for goals more than 10 years). Be realistic with your expectation. Also, if your goal is just 6 years away, then try to avoid equity.
Hi Basu,
Your article is very informative. But since I am very new to mutual fund I do have lot of queries. For now can you please suggest the best mutual funds for -
1. Lump sum amount of 50k.
2. SIP amount of 10k.
Cant say about the duration since I want these amount back hassle free during emergency times.
Also you once mentioned to stay away from NFO. Any reason for that?
Thanks in advance.
Dear Zulfi,
If this fund is also your part of the emergency fund, then stay away from equity and simply use liquid funds. Regarding NFOs, when we have so many varieties already available in the market, then why NFO?
Thanks Basu for your advise. I am seeing a lot of liquid funds to invest. I am little skeptical in which to invest since I am very new to these. Can you specify the liquid MFs to go for lumpsum and SIP.
Thanks
Dear Zulfi,
In which AMCs you have investment? Select the Liquid fund from an AMC with which you are comfortable.
Hi Basu,
I havent invested in any as of now hence need your guidance.
Thanks
Dear Zulfi,
Refer my post "Top 5 Best Liquid Mutual Funds in India in 2017".
I wish to invest 20 Lakhs in Debt Mutual Fund. My time horizon 3 years+. Risk appetite is moderate. Pl suggest.
Dear Kapur,
Use Liquid Funds or Ultra Short Term Debt Funds.