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“.
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.
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.
Now let us move to the selection of mutual 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 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 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.
The rate of taxation is as below for the current FY.
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“.
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.
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.
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.
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.
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.
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.
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 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?
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.
Here, I tried to balance between credit rating, modified duration, and average maturity. The decision was tough but I did my 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.
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.
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.
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?“.
You notice the change in credit rating from earlier funds of AAA to AA. Rest you decide whether you need such funds or not.
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.
Refer my earlier posts related to Mutual Fund Investment in 2017-18
EPF Scheme 2026 explained fully: EPF withdrawal, EPS pension, and EDLI insurance changes with examples,…
Chasing financial freedom? Do health, time, relationships and contentment matter just as much? Sadly, we…
Your "safe" SIPs, SGBs, PPF, or Index Funds are secretly sabotaging your wealth. Peltzman Effect…
Thinking your retirement plan is foolproof? Why LUCK - not asset or fund selection or…
Nifty 50 Index Funds Vs Active Large Cap Funds — Can we really compare them…
Should you pick Nifty 500 Multicap 50:25:25, Nifty 500, or Nifty LargeMidcap 250 Index Fund?…
View Comments
Hello Sir,
I am planning to invest 6000 per month for another 10 to 15 years for my child's education purpose, please suggest me some good plans where I can rely upon, to make it clear I want to let you know that I already have an ongoing PPF. Though I have come to know about SBI smart scholar and HDFC sampooran nivesh but I am unable to decide any and also unaware of these funds performance, my knowledge is very much limited on how these works, so not necessarily I have to invest on these type of child plans, rather I need to know what would be best options or plans or mutual funds which will give me good return after 10 years, please suggest me some. Thank you.
Rishi-Use debt and equity mutual funds with proper asset allocation and start invest. If your knowledge is limited, then take the help of an adviser of your choice.
My age is 57.i will retire in 32 months.So planning to invest 35lacs in debt funds under Ultra short term debt fund category as a lumpsum for less than 3 years. So can I expect capital protection for sure??? and returns 7-8% ??? Since I read ultra short term debt comes with lowest risk in debt funds...is my 35 lacs safe right???also they said birla sunlife floating rate is good in ultra short term debt fund category...so please advise for above questions, mainly 35 lac capital protection and returns at least 7-8%. My wife is a home maker so I put some fixed deposits of another 40 lac on her name..but since she does not have income as she is a housewife, and I heard debt funds less than 3 years has tax based on tax slab...so since my wife is not earning and only having 40 lacs fixed deposit..if I invest in debt mutual fund in ultra short term category on her name, tax will not be deducted right???
Prakasa-Safety depends on in which fund you invest. Also, it depends on your monitoring. NOTHING IS SAFE IN THIS WORLD. Also, I expect around 6% to 7% returns from such funds. Regarding investing in your wife's name, this is best idea.
So i want to Choose BILRA SUNLIFE FLOATING RATE FUND LONG TERM with Lumpsum of 35 Lacs?
Is this a good fund? or any better funds available in Ultra debt fund category better than BILRA SUNLIFE FLOATING RATE FUND LONG TERM??
Also If i invest in my wife name there will be no tax right since she is a housewife and only has bank fixed deposits on her of 40 lacs approx.
Prakasa-My choices are listed above. Do you think by simply investing your money into wife's name (as she is non working) makes you to skip the tax? Due to clubbing provisions, it will be taxed on your head.
What are your ultra short term debt fund recommendations for 2018?
Vignesh-Wait for few more days.
Hi basavaraj,
My parents retire in 2 and half years. Our family survives only one 1CR corpus which comes as PF .so my goal are to meet monthly expenses of 50k .So we are planning to do SWP of 1lakh per month from lumpsum 1CR ultra short term debt fund and reinvest remaining 50kin equity for children marriage, studies which has goal for 20 years .So can I invest this corpus 1CR as lumpsum in ultra short term debt fund for 10-30 years and do a monthly SWP of 1lakh per month??
Satya-I am not sure about your plan due to limited sharing. Also, I am not sure about the SWP or entry into equity. However, YES you can do the lump sum in Ultra Short Term Debt Fund and can do the SWP.
Which investment I should do for child education
My gole is 1cr by 2029
Which sip will be better?
Prasanna-Refer the post completely. You will get answers.
Hello sir, i have 10 lac in fixed deposit planning to invest in ultra short term debt funds and from there i want start sip investment for my wealth and retirement. So my current age is 35 years please can you suggest me some good funds for investment.
Rahul-If goal is long term and you did proper asset allocation, then why not spread the same debt investment into equity for 5-6 months and enter?
Hi Basavarj,
I have currently approx. 6 Lac which was in FD earlier. As interest rates are very low now, I am planning to shift to equity/balanced funds. Currently market seems to be at its peak, I am planning to invest them in Debt Funds and then do STP of 50K per month to avoid the risk of timing market.
Please suggest some good debt funds for this.
Mr basav if i want to delete all my comments how to do that?
Kalprit-May I know the reason?
I dont want anybody check my personal information.
Kalprit-What your personal information is at stake here?
Kalpit-Without knowing time horizon and the reasons for this investment, it is hard for me to guide.
Time horizon is 5 years. Goal is to create a down payment of a flat.
Though timeline is 5 years, I don't want to keep amount for long duration(I e. More than 18 months) in Debt fund.
Kalpit-If your time horizon is JUST 5 years, I suggest you to stick to debt funds than equity funds.
Thanks Basavraj. Please suggest some good debt fund for this.
Kalpit-They are listed in above post.
I want to start SIP of 2000 in debt fund.
My time horizon is 3-4 years and my goal is Car DP.
Please suggest me Good Debt Fund.
I am currently Investing 5500 in Equity Fund SIP and 4000 in Post office RD.
Thanks a lot
Vishal-Use Ultra Short Term Debt Funds from above list.
Is it good time to invest in SBI Dynamic Bond Fund? for a lump sum amount for > 5 years. As i do not want to invest in too highly priced equities. My goal is to get better returns than FD which are tax efficient.
Nitin-If your goal is more than 5 years away, then why you are worrying about equities? Do proper asset allocation and start investing. The best time to invest in equity is TODAY, if your goal is long term and you did proper asset allocation.
Hello!
I want to invest monthly SIP of 27000 across the following mutual funds. I am ok to have the money locked for 10-15 years, hence looking at a horizon of over 10 years. Risk preference is moderate. Is the following combination ok:
1) 9000 in ICICI prudential focused bluechip equity
2) 9000 in HDFC Balanced fund
3) 9000 in ICICI long term fund
Is it ok or should I go for a different permutation?
Thanks in advance and awaiting your valuable advice.
Regards,
SB
SB-First do the asset allocation before jumping into investment. Refer above post.
Since my time horizon exceeds 1 year, I am reorienting my debt SIP to 8100 instead of 9000. For this debt Investment is it ok to invest in 9000 in ICICI long term fund, which is a dynamically managed debt fund. I understand that it is risky to go for long term debt funds as it is more prone to volatility due to interest rate movements, more so since chances of interest rates falling significantly further is low currently. Please guide.
SB-Stick to short term or ultra short term debt funds.
please read 1 year as 10 years, typo.