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Best Debt Mutual Funds: Debt Mutual Funds Investment For 2022

Want to invest in the best debt funds for 2022? Check out this blog! We’ve put together the top debt funds handpicked by our wealth advisor, Wealth First.
June 2, 2022

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Mutual funds have become a popular avenue to generate wealth for working professionals. Factors like professional management, diversification, and more have made mutual funds attractive.

However, many believe that mutual funds are significantly risky and thus, not the right investment for them. 

While certain mutual funds carry a relatively high risk, there are funds known to generate predictable returns like debt funds. We’re going to walk you through how they work and the best debt funds for 2022.  

What Is A Debt Mutual Fund?

A debt mutual fund invests in securities like bonds, treasury bills, commercial paper, and more that generate fixed interest. These securities are generally issued in exchange for a loan. 

The debt fund gets its principal back at the end of the loan’s pre-agreed tenure. The fixed interest that it earns is distributed to investors in the form of returns. 

The world of debt funds is vast and consists of various mutual funds that invest in fixed income securities. This includes (but is not limited to):

  • Liquid funds
  • Overnight funds
  • Ultra short term funds
  • Banking & PSU funds
  • Corporate bond funds
  • Dynamic bond funds 

Each type of debt fund generates varying returns based on the maturity of the security it invests in. That said, debt fund returns are generally predictable in the range of 4% to 6%.  

While this sounds solid, you’ll still have to choose the right debt funds to meet your financial goals. We’re going to help you choose by giving you a sneak peek into the best debt funds for 2022. 

Best Debt Mutual Funds In 2022

You can view debt funds in two ways. One, it can be used to balance a portfolio of aggressive investments. Two, it can be a solid starting point for new or conservative investors who want a flavour of mutual funds. 

Either way, we work with a top-notch advisor who’s been in the game for 20+ years to ensure that you have access only to the best debt funds. Here’s a snippet of the top debt funds for 2022.

Debt Fund Name

3-Year Returns

5-Year Returns

Expense Ratio

Nippon India Liquid Fund

4.21%

5.39%

0.32%

SBI Liquid Fund

4.15%

5.31%

0.28%

Franklin India Overnight Fund

3.60%

-

0.14%

PGIM India Insta Cash Fund

4.21%

5.40%

0.25%

IDFC Banking & PSU Debt Fund

7.42%

7.26%

0.62%

HDFC Ultra Short Term Fund

5.24%

-

0.64%

ICICI Prudential Corporate Bond Fund

7.13%

6.99%

0.60%

Axis Banking and PSU Debt Fund

6.92%

7.22%

0.62%

IDFC Dynamic Bond Fund

7.02%

6.23%

1.60%

Reasons To Invest In Debt Funds?

1. Predictable Returns

Most debt funds invest in securities that generate fixed interest. These are known as fixed income securities. That’s why top debt funds are known to generate stable returns of 4% to 6%. 

While this may not be as high flying as small-cap funds, mid-cap funds, or large-cap funds, it is known to provide stability to conservative and aggressive portfolios alike. 

2. Low Fees

Debt funds are designed to be low-cost investments. This design makes more sense when you consider the type of securities they invest in and the stable returns they generate. 

Thus, the investment fee charged by a debt fund is known to be low. Take a look at the table of best debt funds for 2022. You’ll notice that most debt funds’ expense ratio is less than 1%, except for one.  

3. Diversification

Just like other mutual funds, you can get a lot for the price of one when you invest in a debt fund. The average debt fund can invest in multiple bonds, commercial paper, and more based on the philosophy it follows.  

What this means for you as an investor is that you don’t have to do the heavy lifting - a professional fund manager will handle the buying and selling of debt securities in the complicated bond market. 

Watch this video to know why you should let an expert pick mutual funds.

Risk Involved In Debt Mutual Fund Investments

1. Over/Under Diversification

Investing in a single debt fund gives you access to multiple fixed income securities. What most investors don’t realise is that investing in multiple debt funds can effectively stunt wealth creation. 

For example, buying too many debt funds with overlapping portfolios would mean that you’re paying too much in the form of investment fees for the same bunch of securities. 

2. Credit Risk

There are good debt securities that have a high credit rating. This means that they have a better chance of paying back their debt. Generally, this is denoted by SOV, AAA, and AA+. 

Top debt funds like the ones on Cube invest in such high rated debt securities. That said, there are bad debt securities as well. They may have a poor credit rating. 

If a debt fund is investing in such a security, it’s best to steer clear of it. To know more, consult a financial expert like a Wealth Coach who can help you choose the right debt funds.  

3. Interest Rate Risk

You may have noticed the words interest rate pop up multiple times throughout this blog. Fixed income securities generate interest that’s distributed to debt fund investors as returns. 

The securities that generate these returns are affected by RBI’s interest rate changes. If the RBI decides to increase the interest rate, bonds are known to lose value and by association, debt fund returns dwindle.  

Taxability Of Debt Mutual Funds

If you invest in debt funds, you’ll have to pay tax on two types of gains. One is known as Short Term Capital Gains earned by selling a debt fund before 3 years. Tax on STCG is based on the investor’s I-T slab. 

The other is known as Long Term Capital Gains earned by selling a debt fund after 3 years. Tax on LTCG is 20% flat with indexation benefits, meaning your investment will be adjusted for inflation. 

Read more about saving tax here.

Things To Consider Before Investing In Debt Mutual Funds

1. Your Risk Appetite

At the end of the day, debt funds are linked to the market and are prone to credit and interest rate risks. As an investor, you must evaluate whether you can sail through these risks. 

The best way to get an idea of your risk profile is to:

  1. Take a risk quiz and let Cube’s Perfect Portfolio feature suggest investments
  2. Speak to a Wealth Coach who will understand your life goals, risk profile, and more to suggest investments  

2. Your Financial Goals

Top debt funds are known to be ideal for short to medium term goals that lie between 1 month to 3 years. For example, building an emergency fund or buying a new mobile phone.  

You must understand whether you have short to medium term goals and then proceed to invest in debt funds that can help you meet them. For more information on defining investment goals, read this.  

3. Quality & Track Record

Considering there are hundreds of debt funds and thousands of mutual funds in the market, it’s important to understand that not all funds will be good or bad. 

Evaluating each fund on multiple criteria is necessary to ensure that you choose the right ones. This means going beyond a debt fund’s star ratings and into details like the track record, turnover, and more.

Doing this may be difficult for working professionals. That’s why you could benefit from a service like Cube that gives you access to debt funds that can work for you. Download Cube To Know More.

Note: Facts & figures are true as of 30-05-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in assets like stocks, mutual funds, alternative investments, and others.

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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