Top 10 Debt Funds That You Can Invest in instead of FDs in 2023

Mutual funds offer different opportunities to investors. Debt funds can be a great alternative to fixed deposits (FDs) because they provide higher interest rates and more diversification. They invest in fixed-income instruments like money market entities, corporate debt securities, government bonds, and corporate bonds. In this article, learn about debt funds, how they are an alternative investment option to FDs, and the top 10 debt funds you can consider for investments.

What are Debt Funds?

Also called bond funds or fixed-income funds, debt funds are mutual funds that invest in fixed-income securities. They provide stable returns and are considered less risky than equity mutual funds.

Features of debt funds

1. Debt funds offer interest and capital gains to investors
2. Debt funds are available to investors in different maturity periods and credit risks. These include low-duration, overnight, liquid, and short-duration funds
3. Debt funds have low associated risks compared to equity mutual funds
4. These funds are popular among budding investors looking to incorporate stability into their portfolios.

How Are Debt Funds an alternative to FD?

After understanding what debt funds are, let’s see how they are different from FDs. Some of the key points are:

1. Debt funds invest in debt securities, while FDs are a form of borrowing that banks undertake.
2. The interest rate for debt funds may fluctuate based on the market interest rate, while banks decide the interest rate for fixed deposits.
3. The effective tax rate for debt funds is fixed for indexation benefits, while FDs are taxed at the income bracket.
4. Debt funds never attract any penalty for early withdrawals, while fixed deposits attract penalties when withdrawn before the maturity date.
5. Debt funds are subjected to daily market fluctuations, while fixed deposits offer returns without volatility.
6. Since they provide market-linked returns, debt mutual funds provide inflation-beating returns. However, FDs do not provide similar returns.

10 Top-Best Performing Debt Funds In 2023

List of the top 10 performing debt funds in 2023:

ICICI Prudential Long-Term Fund

It suits investors aiming to invest in equity with tax-saving benefits. It has a statutory lock-in of three years and is ideal for wealth creation. It has a CAGR of 18.72% as of 22 March 2023.

ICICI Prudential Short-Term Fund

It is ideal for investors increasing their debt range and money market entities. It involves different maturities and helps achieve goals like appreciation and capital generation. It has a CAGR of 7.84% as of 21 March 2023.

Nippon India Ultra Short Duration Fund

It helps generate the best returns for the investors, consistent with moderate risk levels. It has a CAGR of 4.89% for one year, 5.60% for two years, and 5.06% for five years.

Nippon India Income Fund

It is an open-ended medium-term debt scheme with a moderate level of risk. It has a CAGR of 3.89% for one year, 4.18% for three years, and 6.89% for five years.

UTI Medium-Term Fund

Investors can go for the benefits of the diversified portfolio with a tactical allocation to the government securities using UTI medium-term funds. It has a CAGR of 2.65% for one year and 2.99% for three years as of 28 February 2023.

UTI Ultra Short-Term Fund

Investors can generate reasonable outcomes using this accrual-oriented income fund with various portfolios. It has a CAGR of 4.64% for one year and 5.3% for three years as of 28 February 2023.

UTI Short-Term Income Fund

It is easy for investors to go for a UTI short-term income fund that allocates to government securities. It has a CAGR of 4.05% for one year and 7.07% for three years as of 28 February 2023.

UTI Treasury Advantage Fund

It is a popular low-duration fund investing in different money markets and quality debt offering reasonable returns. It has a CAGR of 4.88% for one year and 6.8% for three years as of 28 February 2023.

Axis Overnight Fund

It is a mutual debt fund from Axis Mutual Fund offering reasonable returns with low-interest rate risk. It has a CAGR of 5.21% for one year and 3.87% for three years.

Aditya Birla Sun Life Medium Term Fund

It is an open-ended debt fund enabling long-term savings amid market volatility. It has a CAGR return of 22.27% for one year.

Key takeaways

Debt funds offer investors several benefits over other investment options. These include attractive returns and no early withdrawal penalties. It is easy for investors to leverage these benefits by selecting any of the top-performing debt funds mentioned above. 

Debt mutual funds FAQs

Is a debt fund investment better than FDs?

While the debt funds can promise slightly higher returns than FDs, the amount of risk is a little more. The interest rates, in an FD gets locked while in debt funds, it moves with market conditions. Choose FD for assured returns and low risk while debt funds give higher returns but come bundled with some amount of risk.

What are the risks of debt funds?

Debt funds come with risks. Two of the major ones are interest rate risk and credit risk. When interest rates rise, the prices of bonds drop. And then there is the chance that the borrower may default. Hence, your investments may depreciate in value.

Can I make a SIP investment in debt funds?

Of course! Through a SIP, one is investing a fixed amount at regular intervals in debt funds. It shall help you to average out the cost of investments and develop a habit. With time, your money will grow gradually in debt funds.

Who can invest in debt funds?

Such funds will be best for people who seek stable income with lesser risk compared to equity. Primarily, this would include retired people, conservative investors, and all those saving up for short-term goals. They may also be good for beginners starting with mutual funds.

Is it good to invest in debt funds?

They could be a good fit if you want steadier returns than stocks with lower risk. In this, you can get more interest than what you get in fixed deposits, although you face the chance of value fluctuation. Consider your goal and risk tolerance before investing in the same.