Top and Best Debt Mutual Funds in India for 2017

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During this falling interest rate, we all look at better alternatives than Bank FDs. The choice is debt mutual funds. But many of us don’t know how to select the Top and Best Debt Mutual Funds in India for 2017. Let us discuss this and shortlist the funds.

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 2017“.

You must have a proper Financial Goal

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.

Asset Allocation is MUST

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.

Return Expectation

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.

Portfolio Return Expectation

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%.

How much to invest?

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 are enough?

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.

Now let us move to the selection of mutual funds.

Points to understand before investing in Debt Mutual Funds

Credit Risk-

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.

Modified Duration-

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.

Average Maturity-

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 debt fund.

Exit Load-

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 all debt funds are taxed differently than the equity funds. Hence, you must understand the taxation part as well before jumping into debt fund investment. I tried to explain the same in below image.Mutual Fund Taxation FY 2017-18 -Based on holding period

The rate of taxation is as below for the current FY.

Mutual Fund Taxation 2017-18 -Capital Gain Tax Rates

Hope taxation part is clear to all of you. If you still have doubt, then refer my latest post “Mutual Fund Taxation FY 2017-18 and Capital Gain Tax Rates“.

How I selected Top and Best Debt Mutual Funds in India for 2017?

My first priority should be safety and less volatility. 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 is 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.

Top and Best Debt Mutual Funds in India for 2017

I already covered the listing of best liquid funds in my earlier post. Refer the same at “Top 5 Best Liquid Mutual Funds in India in 2017“.

Here are the funds which I selected as Top and Best Debt Mutual Funds in India for 2017.

Top and Best Debt Mutual Funds in India for 2017 -Ultra Short Term Debt Mutual Funds

Ultra 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.

Top and Best Debt Mutual Funds in India for 2017-Ultra Short Term Debt Fund

I selected these two funds among the list. The criteria involved is 3 years and 5 years return ranking. Along with that, the credit quality instruments the funds invested.

I also selected the fund which not goes beyond 2 years average maturity nor less than a year.

Top and Best Debt Mutual Funds in India for 2017 -Short Term Debt Mutual Funds

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 are my top and best short-term debt mutual funds to invest in India in 2017.

Top and Best Debt Mutual Funds in India for 2017 Shor Term Debt Funds

I selected Birla Fund mainly because of its credit quality, consistency since 5 years and the moderate risk. Same way, I selected Escorts Fund for the reason of quality of the fund and consistency in return.

Top and Best Debt Mutual Funds in India for 2017 -Gilt Short Term Mutual 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.

Top and Best Debt Mutual Funds in India for 2017 -Gilt Short Term Mutual Funds

You noticed the returns of these funds with above shared short-term debt funds. With same interest rate risk (modified duration) and average maturity, the returns are spectacular. Then why not think about such funds where risk is minimal and returns are best?

Top and Best Debt Mutual Funds in India for 2017 -Income Mutual 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. Entry and exit from these funds

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.

Top and Best Debt Mutual Funds in India for 2017 -Income Mutual Funds

Here, I tried to balance between credit rating, modified duration, and average maturity. The decision was tough but I did my best.

Top and Best Debt Mutual Funds in India for 2017 -Gilt Medium and Long Term Funds

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.

Top and Best Debt Mutual Funds in India for 2017 -Gilt Medium and Long Term Funds

Just notice the modified duration and the average maturity with respect to returns such funds generated due to falling interest rate. Hence, now may be the better time. But I am not suggesting such funds for the investors who unable to track interest rate movements.

Top and Best Debt Mutual Funds in India for 2017 -Dynamic Bond Funds

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 falling interest rate, these funds holding long-term debt securities.

Top and Best Debt Mutual Funds in India for 2017 -Dynamic Bond Funds

Top and Best Debt Mutual Funds in India for 2017 -Credit Opportunities Fund

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?“.

Top and Best Debt Mutual Funds in India for 2017 -Credit Opportunities Fund

You notice the change in credit rating from earlier funds of AAA to AA. Rest you decide whether you need such funds or not.

Myths about Debt Mutual Funds-

# Debt Mutual Funds are SAFE

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.

# We must match our goal with average maturity of the fund

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.

# Timing the interest rate movements

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.

# Credit Rating is constant

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.

Refer my earlier posts related to Mutual Fund Investment in 2017-18

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