Debt mutual funds: Which ones to invest in?

In an earlier post, we built a winning equity mutual fund portfolio. This time we will look at debt mutual funds and see which ones can best deliver on your investment goals.

As I set out to select debt mutual funds, I realised this huge challenge staring at me. If selecting equity funds was like running a marathon, selecting debt mutual funds is akin to climbing Mount Everest.

Why?

Read moreDebt mutual funds and their benefits

The world of debt mutual funds

There are over 500 debt mutual fund plans (including multiple plans of the same scheme) from about 40 different Asset Management Companies that one has to sift through before making a choice of the right one to invest in.

To being with, debt mutual fund schemes come in the following variants:

  1. Money Market / Liquid funds
  2. Ultra short term funds
  3. Debt funds (both short and long term)
  4. Gilt funds (both short and long term)
  5. Credit Opportunities Funds
  6. Income Funds

And there can be several variants within these categories. That is where selection becomes so much more difficult.

Read more: Make your cash in the bank work harder

Selecting the right debt mutual funds

So, as I said, selecting the right debt mutual funds is an extremely time consuming exercise. And I know how difficult it can be for a retail investor like you and me to zero in on the right scheme for our investments.

There are several other sources available, which guide you on fund selection based on star ratings and rankings. But they have their limitations too.

I have made an effort here to select the debt mutual funds that you and I can use for our investments. And I and glad to share not only the the list of the funds but also the method that I used.

Here is how I went about doing this exercise using data.

My primary data source for the debt mutual funds is ValueResearchonline. The data is as available on September 11, 2015.

The filters or parameters that I used to  shortlist the funds are as follows:

  1. Only those schemes have been included that have been in existence for at least 3 years.
  2. All schemes with less than Rs. 100 crores of Asset under Management were excluded. Size matters in debt funds.
  3. The focus is on selecting diversified schemes and hence Gilt funds (which invest only in Government securities) or Banking and PSU sector focused funds were also excluded.
  4. Cost is an important factor when it comes to debt funds. Hence, only direct plans have been consideredDirect plans do not pay out any distributor commissions and hence the savings are added to your returns. I observed that the expense ratios of direct plans were almost half of those of the regular plans.
  5. Debt funds invest in Credit instruments of other companies or the government. To ensure the safety of the portfolio, the credit quality of the portfolio is important too. Hence, only High and Medium Credit quality funds have been included in the list.

Post applying the above filters, I have a list of 134 ‘direct plan’ funds. This is still a huge number.

Further, I excluded those funds on which key data was not available from my ValueResearch download. That left me with 64 funds in the following 4 key categories:

  • Liquid funds – For time horizon of upto 1 year.
  • Ultra Short term funds – For time horizon of 1 to 2 years.
  • Short term funds (includes floating rate funds) – For time horizon of 2 to 3 years.
  • Income funds (includes credit opportunities, bond funds) – For time horizon of greater than 3 years.

These 4 categories are adequate to make a choice of a fund based on the time horizon of your investment.

We still need to cut down the list further. Now, in each of the above categories, there were fund houses with more than 1 scheme. That to me looks redundant. There is not much difference between one scheme and the other. My view is that they have been created for marketing purposes and not for some real investing portfolio difference.

As a retail investor, I really don’t care for the marketing. I need simple, understandable products that help me meet my investment objectives.

Hence, it’s time to prune the list further. Using filters of Expense ratio, Sharpe ratio and Standard Deviation, I now have just 29 debt mutual fund schemes spread across the 4 categories mentioned above.

(lets out a deep breath)

The final list of debt mutual funds

So, here’s the final category-wise list.

Liquid Mutual Funds list

debt mutual funds - liquid

Ultra Short Term Funds list

debt mutual funds - ultra short term

Short Term Funds list

debt mutual funds - short term

Income Funds list

debt mutual funds - income

It definitely has not been easy job to make this list.

I would also like to confess that the list may not be perfect. But I believe it does the job.

I also understand that it still may not solve the problem of which fund you should select and invest in. 7 in each of the category is still a lot. Honestly, once you know your time horizon, you can choose any fund from a category and you should be good.

A few more points for you to consider before investing:

  • Debt funds can have exit loads. Take into account the exit load period before you invest in any fund scheme.
  • There are also restrictions on the minimum investment amount. Check the fund details to know that you are investing the minimum amount as required.
  • There are also tax implication to the mutual fund that you are investing in. Know before you invest.

I hope you are able to make the most of this analysis and the list of debt mutual funds.

Happy Investing!

Read more: How to (or not to) select mutual funds


IMPORTANT NOTE: Now invest in the direct plans of your mutual funds on a platform that I created for you – Unovest.

Click here to create your FREE account.


Between you and me: I would love to know your views and feedback. Here’s one more post you would like to read on making the cash in your bank work harder.

A note of caution: Consult your investment advisor to understand which mutual fund is right for your investment needs and time horizon.

27 thoughts on “Debt mutual funds: Which ones to invest in?”

  1. Excellent information for new investor in debt mutual fund. Birla sunlife has also good debt funds. It seems to be little biased list.

    • Hello Parmesh, the list was made based on the data available. Some of the funds had information missing and hence they were excluded. It doesn’t mean that they are to be ignored. This list is only indicative. Thanks.

  2. Another thought: Instead of investing in a debt fund (and making a separate investment in an equity fund), invest in a hybrid fund, to reduce tax.

  3. Hi vipin,

    I believe consideration of Avg. maturity and YTM along with ratings of securities a fund hold needs to be analysis for short listing a debt scheme. Sorry if I am wrong on this, but the recent JSPL fiasco or earlier amtek auto rating downgrade has affected the performance of many debt funds who were holding these securities. For me duration, liquidity and credit risk should be the first thing to look rather then exp. ratio or SD which ignore credit quality of securities. I can even go in detail and see the modified duration to see the impact of any policy rate changes if I am looking to invest for less than two years. than again, I have not invested in debt funds yet so chances of me getting wrong on this might be high, very high
    Cheers 🙂

  4. What about Reliance liquid fund? They give you an ATM-cum-debit card, and the ability to get your money instantly seems more valuable than a marginal difference in return or volatility. After all, the whole point of a liquid fund is quick access to money. If my liquid fund has a debit card, I can keep less balance in my savings account, where it earns a measly 4%.

    Is there anything I’m missing? Thanks.

    • Well, thanks for making me aware of this. Sounds like an interesting feature. If you are ok with the marginal loss of return, this should be a good proposition. I hope you are aware that unlike your BANK ATM card, this scheme doesn’t allow you to withdraw the entire amount. There are certain caps.

  5. Hello, it’s me again, i was reading up on debt funds and came across this post, so two excellent blogs posts in one day, good job! owe you a beer whenever you are down in Goa!

    • Thanks Saji. Unfortunately, I have no view on Gilts. It is like taking a sectoral call and I am not expert at that. I would rather invest in an income fund where the fund manager can take a call on the portfolio and position it accordingly. Hope this helps. Thanks.

  6. Thanks for such a breakdown of details for easy understanding.
    However as you say one still needs to select and choose. What I understand is the Standard Deviation close to 1 is better (avoid extreme disbursement). Can you elaborate on Sharpe Ratio how to select.

    • Hi Sushila, Thanks for the comment and the question. In my view, standard deviation cannot have benchmarks. It is best to see it in comparison with other funds. The fund with a lower standard deviation is a preference for me because it is less volatile than the others. See this interesting piece from morningstar to know more. http://news.morningstar.com/classroom2/course.asp?docid=2927&page=2

      As for the Sharpe Ratio, it is returns per unit of risk taken. Risk is measured by the standard deviation. Returns are what they are. Divide returns by standard deviation and you will have the Sharpe Ratio. The higher the Sharpe ratio, the better the fund is, generally speaking.

      Hope this helps. Thanks again.

  7. Amazing!!!

    Another killer post Vipin, I have become your fan. Recently started investing, stumbled across your blog and bazinga 🙂 everything is so clearly explained here!

    One question though, do you recommend investing through SIP in Debt MFs like the equity ones? Or doing it lumpsum is a better option?

    • Thanks a lot Abhinav for the feedback. I feel glad to be of any help. As for your question, if you have lumps available right now, you can put it all in one go. If you want to park some part of your money in debt funds (say for your emergency needs) on a regular basis, then SIP is a good method to go for. SIP is more of a discipline than anything else. Hope this helps. Thanks.

  8. One of the best website/blog I came across. It solves all the problems that a common investor would face. Instead of going through much technical details (which other websites/blogs do), the focus is on simple understandable language, that’s where this blog earns brownie points…kudos to Vipin for such nice article and all the good stuff he is doing! Believe me it is not that much easy task!
    Thanks Vipin!!!!

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