How to select best debt funds in India

best debt fund

There are way too many variables both domestic and international that determines the direction of interest rate which makes difficult for even a experienced debt fund manager to make such a call, so how can one  expect a retail investor to take a call.

To manage different type of debt instruments there are variety of debt funds available with different durations and maturities (read :Type of debt funds). One can select among those as per his requirement. But due to the inherent risk in the debt instruments, it is very important to understand those risks and take prudent call(also read :Understand the risks in debt funds). One should go through the fund fact sheet in details or should ask the advisor to provide you with some necessary details before investing into any debt fund.  Some of the checks one can make before selecting among debt funds are as follows:

1.     Average Maturity :

You should be clear onto your goal and time horizon. Your time horizon should match with the average maturity of that fund. Average maturity tells the weighted average maturities of all securities held in that fund. So if you want to park your money for 1 month then you should not go with Income funds or Gilt funds having higher average maturity. The best selection for you would be liquid or ultra-liquid Funds.

2.     Modified duration:

Modified duration is the measure of sensitivity of particular fund to market interest rates. Like Beta is for equity funds, Modified duration is for debt funds. Higher the modified duration, higher will be the volatility. Thus if you expect market interest to go down in near future than you should go with the funds of higher Modified duration. But be informed it also carries equal risk, which means that if your expectation does not turn up correct then your assumed gains can be converted into losses.

 3.     Yield to maturity (YTM):

This figure will give you an idea of what returns can you expect out of fund’s portfolio. This figure must be compared with current returns of your safe instruments like PPF/Bank Fixed deposits. Yield of funds should not be much higher in comparison. Higher yields sometimes would mean compromising on the quality of papers and thus safety of instruments. This increases credit risk in those bonds and sometimes leads to liquidity risk also.

 Below is the illustrative table showing the effect of fall/rise in the market interest rates on annualised yield of different funds with different modified durations.

Scheme TypeWeighted Avg YTM (%)Modified Duration (in Yrs.)Annualised Return on 100bps fall in ratesAnnualised Return on 100 bps increase in rates
Ultra short term fund9.670.4510.129.22
Short Term fund9.351.7211.077.63
Gilt Securities fund8.356.7915.141.56

4.     Quality of papers in portfolio:

The quality of debt instruments in the fund’s portfolio is of utmost importance and should be scrutinised closely. One should check the credit rating assigned to each instrument like (AAA, AA+ etc.)  this signifies the level of credit/default risk. The higher the rating, the safer the instrument.(Read :Risks in debt funds)

While a debt fund with a risky paper is likely to yield higher returns, it may work unfavourably for the investor. As to a debt investor the safety of capital is very important, so one should avoid the funds with low quality investments.

5.     Expenses ratio :

The expense ratio is very critical for a debt fund as the returns are low. Return expectation out of debt fund is in the range of 8-10%, thus expensive cost structure will be of a negative effect to the returns. So it is very important for investors to ensure that the cost structure is low and in line with the returns being offered by the fund.

In today’s kind of scenario, debt funds are looking very attractive to invest in. So one should keep the above checks in mind and do the due diligence on his part carefully before entering into these.

Top 10 Open Ended -Debt Funds – Period (Last 12 Months)


Scheme Name

Last 12 Months

Since Inception


Canara Robeco InDiGo Fund – Growth




Escorts Income Plan – Growth




Sahara Short Term Bond Fund – Growth




Sundaram Select Debt – Short Term Asset Plan – Appr




SBI Dynamic Bond Fund – Growth




UTI Bond Fund – Growth




Axis Triple Advantage Fund – Growth




IDFC Dynamic Bond Fund – Plan B – Institutional Plan – Growth (Re-Launched)




HDFC Multiple Yield Fund – Growth




Taurus MIP Advantage Fund – Growth



Source: ; returns as on 15/02/2012

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He’s MBA ( Finance) gold medalist, a CERTIFIED FINANCIAL PLANNER, Chartered Trust and Estate Planner and SEBI Registered Investment adviser. He has authored a Book in collaboration with CNBC TV 18 Network 18 bestesellers , tiltled "The Art of Being Good with Money". An ex banker , having a 17+ years of long experience in financial services industry he manages clients across the globe. He is a regular contributor to various leading Media and publication houses. He has written for Moneycontrol, Dainik bhaskar, Business standard, Live mint, Indian Express, The Tribune etc. He has also appeared in TV shows by Zee Business, ET Money, National Door darshan, Jagran Online. He also delivers training on Various personal finance topics to various corporate houses. You may get in touch with him at [email protected]


  1. […] 6.      Floating rate funds: In these cases investment is made in those securities where, the interest offered by the security is linked to some benchmark rate and reset periodically in order to adjust for the changes in the market interest rates. This fund is more or less like liquid funds and its returns move in the same direction where the market interest rates are moving. (Read:How to select debt funds) […]

  2. Thanks for this informative article.
    Can u please name any 2-3 debt funds for investment. I want to keep money for 2-3 years.

    • In today’s kind of scenario, i would recommend you to go with IDFC SSI medium term plan or Birla sunlife Dynamic bond fund, but if you are ready to bear the volatility for better return prospects then you may invest in IDFC Dynamic bond fund or any pure long term GILT fund. But do check the portfolio as suggested in article above

  3. I have recently invested in bank FD with 9% rate of return. FD tenure is of 1 year. Do you suggest to come out of it and invest in debt funds.

  4. Suresh, it all depends on how risk seeker you are. Where FD assures you 9% return, there debt funds can’t provide you with such guarantee. Where FD can assure you only 9% there debt funds may generate much better returns in today’s kind of economic scenario. Debt funds are also tax effective instruments. If you come in higher income tax bracket and can compromise with the liquidity then these days you may invest in FMPs, which are coming up with complete CD portfolio. you may easily expect rate in the range of 9.5% – 10%

  5. […]  Interest rates movement: If one is aware of how debt product actually performs with the interest rate cycle, then he/she can take advantage of high rate by investing the portion in debt mutual funds, to take the benefit of fall of interest rates in future.(Read : How to select debt funds) […]

  6. […] In 2008-09 I saw people comparing Equity funds to GILT funds, as gilt funds were giving astonishing returns at that time, same way last year many people are asking about gold funds. We get attracted towards return very easily, without understanding the logic behind it. One has to work on his investment behavior if he wants to generate good returns from his overall investment portfolio. (Read – How to select Debt funds in India) […]

  7. i am just retired and will be getting my terminal benefits soon . i have invested 4 lacs at 9.25 % in bank fd and may need to invest 10-15lacs more . what should be my investment ladder.can u guide

    • Mr narang, this is typical case of retirement income planning. I would suggest if you come under higher income bracket than its better to go with some short term debt funds with a time horizon of above 1 year. If you want to supplement your monthly income , you may also consider Investing in MF MIP. But i would advise you to consult a financial planner in your area who will be in a better position to guide you looking at your other requirements.


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