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8 Debt Funds That Gave Better Returns Than FDs

Looking for the best debt funds to outperform FDs? Read this story to access 8 of the best funds in India for 2021. Learn if debt funds are better than FDs. Find out how you can invest in top-performing debt funds.
June 16, 2021

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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.

List Of 8 Debt Funds That Gave Better Returns Than FDs

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. 

  • Clients: 3,000+
  • AUM: Rs. 7,000+ crores

1. IDFC Banking & PSU Debt Fund

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.

  • 1-Year Returns: 6.70%
  • 3-Year Returns: 9.69%
  • 5-Year Returns: 8.09%
  • Since launch: 8.39%
  • AUM: ₹18,547 crores
  • Min. investment: ₹5000

IDFC Banking & PSU Debt Fund Portfolio 

Bond

Rating

8.50% National Bank Agr. Rur. Devp

AAA

7.60% Axis Bank 20/10/2023

AAA

8.25% Indian Railway Finance Corporation 28/02/2024

AAA

7.32% GOI 28/01/2024

SOV

7.16% GOI 20/05/2023

SOV

Invest in IDFC Banking & PSU Debt Fund

2. ICICI Prudential Corporate Bond 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).

  • 1-Year Returns: 8.47%
  • 3-Year Returns: 8.51%
  • 5-Year Returns: 8.07%
  • Since launch: 8.50%
  • AUM: ₹19,871 crores
  • Min. investment: ₹1000

ICICI Prudential Corporate Bond Fund Portfolio 

Bond

Rating

GOI 22/09/2033

SOV

6.64% GOI 16/06/2035  

SOV

4.60% National Bank Agr. Rur. Devp 29/07/2024

AAA

6.22% HDFC 2021

AAA

5.35% National Housing Bank 2024

AAA

Invest in ICICI Prudential Corporate Bond Fund

3. Axis Banking and PSU Debt 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+). 

  • 1-Year Returns: 6.32%
  • 3-Year Returns: 8.97%
  • 5-Year Returns: 8.16%
  • Since launch: 8.47%
  • AUM: ₹17,077 crores
  • Min. investment: ₹5000

Axis Banking and PSU Debt Fund Holdings

Bond

Rating

Bond - Food Corporation of India Ltd.

AAA

Bond - Govt of India

SOV

Bond - National Bank for Agriculture & Rural Development

AAA

Bond - National Thermal Power Corporation Ltd.

AAA

Bond - Hindustan Petroleum Corporation Ltd.

AAA

Invest in Axis Banking and PSU Debt Fund

4. IDFC Dynamic Bond 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.

  • 1-Year Returns: 4.37%
  • 3-Year Returns: 10.06%
  • 5-Year Returns: 8.62%
  • Since launch: 8.35%
  • AUM: ₹3,857 crores
  • Min. investment: ₹5000 

IDFC Dynamic Bond Fund Portfolio

Bond

Rating

6.97% GOI 2026

SOV

5.63% GOI 2026

SOV

6.79% GOI 15/05/2027

SOV

8.20% GOI 24/09/2025

SOV

7.17% GOI 2028

SOV

Invest in IDFC Dynamic Bond Fund

5. HDFC Money Market 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.

  • 1-Year Returns: 4.57%
  • 3-Year Returns: 6.90%
  • 5-Year Returns: 6.81%
  • Since launch: 7.17%
  • AUM: ₹15,382 crores
  • Min. investment: ₹5000 

HDFC Money Market Fund Portfolio

Bond

Rating

Bond - Govt of India

SOV

Bond - Govt of India

SOV

Bond - Govt of India

SOV

Bond - T-Bill

SOV

Bond - Sun Pharmaceutical Industries Ltd.

P1+

Invest in HDFC Money Market Fund

6. IDFC Ultra Short Term 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).

  • 1-Year Returns: 3.76%
  • Since launch: 6.47%
  • AUM: ₹5,929 crores
  • Min. investment: ₹100 

IDFC Ultra Short Term Fund Portfolio

Bond

Rating

Reserve Bank of India 182-D 03/06/2021

SOV

Reserve Bank of India 91-D 19/08/2021

SOV

Reliance Industries 91-D 27/08/2021

A1+

Axis Bank 23/08/2021

A1+

Reliance Industries 87-D 06/08/2021

A1+

Invest in IDFC Ultra Short Term Fund

7. Axis Money Market 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+).

  • 1-Year Returns: 4.41%
  • Since launch: 5.92%
  • AUM: ₹3,179 crores
  • Min. investment: ₹5000 

Axis Money Market Fund Portfolio

Bond

Rating

8.79% GOI 2021

SOV

Reserve Bank of India 182-D 14/10/2021

SOV

National Bank Agr. Rur. Devp 164-D 27/09/2021

A1+

Reserve Bank of India 91-D 08/07/2021

SOV

Reserve Bank of India 182-D 04/11/2021

SOV

Invest in Axis Money Market Fund

8. HDFC Ultra Short Term 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. 

  • 1-Year Returns: 4.69%
  • Since launch: 6.73%
  • AUM: ₹16,735 crores
  • Min. investment: ₹5000 

HDFC Ultra Short Term Fund Portfolio

Bond

Rating

Reliance Industries 120-D 25/06/2021

A1+

8.35% GOI 2022

SOV

8.20% GOI 15/02/2022

SOV

Reliance Jio Infocomm 91-D 15/07/2021

A1+

Reserve Bank of India 182-D 14/10/2021

SOV

Invest in HDFC Ultra Short Term Fund

Debt Funds V/S Fixed Deposits

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.

Investment Facts

Risks Associated With Fixed Deposits

1. Interest Rate Fluctuation

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. 

2. Meagre Returns

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. 

3. Underperforming Versus Inflation

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. 

Risks Associated With Debt Funds

1. Interest-Based Risk

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.    

2. Credit Risk

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.  

3. Market Linked 

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

How Are Fixed Deposits Taxed?

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. 

How Are Debt Funds Taxed? 

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:

Tax Type

Duration

Rate Of Tax

Short Term Capital Gains

< 3 years

Investor’s tax slab

Long Term Capital Gains

> 3 Years

20%

Debt funds also offer “indexation” benefits which basically means that only the returns that are above the inflation rate are taxed. 

Explore Top Debt Funds

Are Debt Funds Better Than FD?

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. 

Metric

Figures

Inflation

5.1%

Debt funds

6-8%

Fixed Deposits

4.5-5.5%

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. 

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. 

FAQs

1. How do debt funds work?

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.

2. What is a bond in simple terms?

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. 



Shriram Shekhar
Shriram is a Content Marketer at Cube Wealth, the Financial Freedom App with a smart Perfect Portfolio Planner. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. Shriram’s love for philosophy, product development, and empowering people through quality content is what got him to Cube Wealth.

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