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Bank fixed deposit returns have fallen from 13% in the 1990s to approximately 5.5% in 2021. Most investors have therefore started looking for alternatives to FDs.
However, caveats do apply! The safety of an FD is one of the biggest USPs of the investment option. Naturally, investors would want the fixed deposit alternative to have a similar risk profile.
Keeping this in mind, investment options like debt funds have emerged as an FD alternative. Debt funds have been known to produce better returns than FDs with higher liquidity, similar safety, and tax benefits.
That is why this blog will walk you through 8 of the best debt funds that you as an investor can access using Cube Wealth. These debt funds have also historically produced better returns than FDs. You can consult a Cube Wealth Coach or download the Cube Wealth App.
The debt funds mentioned below are handpicked by Cube’s mutual fund advisor, Wealth First, who have a track record of beating Nifty by ~50% over the past decade.
IDFC Banking & PSU Debt Fund holds debt securities like bonds issued by the government, banks, and public sector undertakings. These bonds are generally of the AAA variety that’s the highest rating assigned to a bond in India.
Invest in IDFC Banking & PSU Debt Fund
ICICI Prudential Corporate Bond Fund primarily invests in bonds issued by private companies and large corporations. The fund also holds bonds issued by the government. The credit rating of the bonds ranges from AA+ (solid) to AAA (highest).
Invest in ICICI Prudential Corporate Bond Fund
Axis Banking and PSU Debt Fund holds bonds issued by government-backed, low-risk banking, finance, and public sector undertakings. These bonds have a high credit rating (AAA, F1+, P1+).
Invest in Axis Banking and PSU Debt Fund
IDFC Dynamic Bond Fund tries to tap into the best of every bond right from duration to type. The fund primarily holds short term and long term bonds issued by the government that have a high credit rating.
Invest in IDFC Dynamic Bond Fund
HDFC Money Market Fund invests in debt securities, cash and cash equivalents that mature in the short term. The bonds held by the fund have a high credit rating that is generally issued by the government.
Invest in HDFC Money Market Fund
IDFC Ultra Short Term Fund is a fairly new fund that was launched in 2018. It invests in bonds that mature in 3 to 6 months. IDFC Ultra Short Term Fund holds bonds with a high short term credit rating (A1+, AAA).
Invest in IDFC Ultra Short Term Fund
Axis Money Market Fund holds bonds that mature in the short term along with cash and cash equivalents. The bonds held by the fund have a high credit rating (A1+).
Invest in Axis Money Market Fund
HDFC Ultra Short Term Fund generally holds bonds that mature in 3 to 6 months. The fund is fairly new as it was launched in 2018. The bonds held by the fund are generally a mix of commercial paper and government-backed securities with a high credit rating.
Invest in HDFC Ultra Short Term Fund
Debt funds fare well against fixed deposits when it comes to average returns, liquidity, and tax benefits. While debt funds are relatively safer than other mutual funds, they are comparatively riskier than FDs.
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The Reserve Bank of India (RBI) may tighten the interest rate from time to time as evidenced by the past. Thus, interest rate changes might lead to a fluctuation in the returns generated by FDs. You can consult a Cube Wealth Coach or download the Cube Wealth App.
Fixed deposits do a good job when it comes to safety but they tend to produce meagre returns that are tied to the interest rates set up by the RBI.
An asset that doesn’t outperform inflation can lead to wealth stagnation where your money just doesn’t grow enough for you to achieve goals like financial freedom.
Debt funds are prone to RBI’s interest rate changes because they primarily invest in bonds that are tied to the repo rate. Bonds have been known to gain value when the interest rate rises.
At the same time, bonds may lose value when the interest rate is lowered by the RBI.
However, you’ll get clear sell instructions from Wealth First if you’re investing with Cube. Furthermore, Wealth First handpicks only the best debt funds based on thorough research and analysis.
Credit risk or default risk is a part and parcel of every investment that engages in debt. By association, debt funds are potentially at risk as well. The majority of a debt fund’s portfolio is locked in bonds.
But the debt funds recommended on Cube have exposure to bonds that are rated AAA, F1+, and P1+, all of which are the highest credit ratings a debt instrument can receive.
Debt funds invest in securities that are tied to the market and as a result, carry the risks associated with price movements and volatility.
Read this blog to know more about choosing the right mutual funds
Up to ₹1,50,000 invested in a tax-saving FD is tax-exempt under Section 80C. This is not applicable for regular FDs. Moreover, the returns are still subject to tax in both cases even if you don’t redeem the investment.
The gains from FDs are added to the income and taxed according to the investor’s tax slab. Point to note, FDs do not carry indexation benefits, but debt funds do.
Debt funds are known to be more tax-efficient than FDs because your investment is only taxed when you redeem it. There are two types of taxes applicable on debt funds:
Debt funds also offer “indexation” benefits which basically means that only the returns that are above the inflation rate are taxed.
Returns, liquidity, and overall tax benefits are the reasons why debt funds are better than FDs. There’s more. One of the main motives of investing in any asset is to get returns that beat inflation.
Debt funds, on average, generate approximately 6 to 8% returns that are well above the current inflation rate of ~5% in India. On the other hand, FD interest rates fall between 4.5-5.5 on average.
Furthermore, apps like Cube give you access to top-performing debt funds that are handpicked by Wealth First. This can help you concentrate on wealth creation without worrying about picking the right options.
What you must know is that FDs are considered to be safer than most debt funds simply because they are not market linked and there are schemes that shield your investment from total loss. You can consult a Cube Wealth Coach or download the Cube Wealth App.
Either way, you must invest in any asset only after understanding your risk profile. Cube’s risk analysis quiz is the easiest way to know your risk profile.
Moreover, the assets that you buy directly tie into your investment goals. So, it would help to evaluate and narrow down your short, medium, and long term goals before investing in any asset.
Download the Cube Wealth app to access the best debt funds in India.
A debt fund is a type of mutual fund that mainly invests in debt securities like bonds, commercial paper, T-bills, etc. issued by governments and large corporations.
A bond is nothing but an agreement between a lender (the debt fund) and the borrower (government, private companies, etc) to pay back the principal in period intervals along with interest.
Investors seeking alternatives to traditional Fixed Deposits (FDs) often turn to debt funds for potentially better returns. The eight debt funds featured in this comparison have demonstrated the capacity to outperform FDs, offering potentially higher yields and providing an attractive option for fixed-income investors.
Debt funds come in various categories, such as liquid funds, short-term funds, and dynamic bond funds, each with different risk and return profiles. Investors should carefully consider their financial goals, risk tolerance, and investment horizon when selecting debt funds.
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