- Have a low to moderate risk appetite and look to invest for a year?
- Invest in overnight funds, liquid funds, etc - Read this post to know all such funds and why should you invest there
Debt funds invest in debt securities such as corporate bonds, money market instruments, commercial paper, certificate of deposit, treasury bills and government securities. Different types of debt funds invest for varying maturities or duration of these securities. So, there could be a debt fund investing in securities maturing in a day, month, year, three years and more.
Your time horizon of investment plays an important part in selecting the right debt fund. There are different and appropriate debt funds for varying time horizons.
If you wish to invest for the next one year, we recommend investing based on your risk appetite.
If you have a moderate risk appetite, two types of debt funds are suitable for you – low duration and short duration debt funds. These funds should deliver 2-3% extra returns over the funds mentioned below with lower risk in the next one year.
However, if your risk appetite is low and you want safety, we do not recommend investing in the above-mentioned funds. The most suitable type of debt funds for you are ultra-short, liquid or overnight funds. You can expect a 4-6% annualized return from these funds in the next one year.
You can invest in these funds by picking the best one or two funds in each category. We have also detailed the best funds in each category with links given below.
Table of Contents
Best Debt Funds for the Next 1 Year with Moderate Risk
Low Duration Debt Funds
Low duration funds are open-ended debt funds that invest in debt securities with a duration between six to twelve months. For simplicity, you can assume duration to be the period in which the debt security will fully mature and return all coupons or interest payments.
The objective of these funds is to deliver better returns than liquid funds by taking a call on interest rate movements in the short term. Thus, these funds do have interest rate risk, but it is much lesser than short term, medium duration, long duration and gilt funds.
These funds do well in a falling interest rate scenario and can outperform liquid funds by 1.50-3.00%. So, one can expect returns between 7-9% from these funds. To know about the best low duration funds, you can read another post of ours – https://www.wishfin.com/mutual-fund/five-best-low-duration-debt-funds-to-invest-in/
Short Duration Debt Funds
Short duration or short-term funds, as they are called, are a category of debt funds that invest in money market instruments such as government securities and corporate bonds. As the name suggests, the duration of these securities is short, it is in the range of 1 to 3 years. Simply put, the duration is the period in which the bond or security will mature and give the entire interest back to the lender.
These are different from liquid and ultra-short-term funds that carry a duration of less than 91 days. Since short duration funds carry a higher duration as compared to liquid or ultra-short-term funds, both risks and returns are higher. To know about the best short duration funds, you can read another post of ours- https://www.wishfin.com/mutual-fund/three-best-short-duration-funds-to-invest-in/
Best Debt Funds for the Next 1 Year with Low Risk
Ultra Short Term Funds
Ultra short term funds are a type of debt funds that invest in debt securities (corporate bonds, government securities and money market instruments) with an average maturity of 3-6 months. They are like liquid funds with the exception that liquid funds cannot invest in securities with maturities beyond 91 days.
Since these funds invest in securities with higher maturities, the risk and return are relatively higher than liquid funds. This is because interest rates do not fluctuate a lot in the short term thereby having a lesser impact on the risk & returns of various debt funds. As the average maturity of a debt fund increases or is higher, interest rates have a bearing on the risk and return from that fund.
These funds are the best option for the next 6 months when we evaluate both risk and return expectations. To know the best ultra-short term funds, you can read another post of ours- https://www.wishfin.com/mutual-fund/five-best-ultra-short-term-funds-to-invest-in/
Liquid funds are a type of debt fund that invests in treasury bills, commercial papers, bank fixed deposits. The maturities of all these in a liquid fund is up to 90 days. When you invest your money in a liquid fund, the same is lent by the mutual fund to institutions such as banks and corporates.
One can view these as an alternative to keeping money in a savings bank a/c where you get 3-4% whereas liquid funds tend to return 5-7%. There is no lock-in, one can withdraw anytime. There are no exit loads in liquid funds – when one withdraws, no amount is deducted by the AMC.
These funds are a safe option for the next 6 months with low risk but better returns than a savings bank account, to know the best liquid funds, you can read another post of ours- https://www.wishfin.com/mutual-fund/5-best-performing-liquid-funds-to-invest-in/
Overnight funds are open-ended debt mutual funds that invest in securities with overnight or one-day maturities. These securities are treasury bills, certificate of deposits, commercial papers, floating rate debt instruments.
This implies that the fund manager buys these debt securities every day for a day and sells it the next day. He/she again buys these securities the next day, again for a day and this is how the portfolio is managed. Overnight funds do not invest in securities with a maturity profile of more than a day. These funds are the safest option for the next 6 months, returns will be marginally better than savings bank accounts. To know the best overnight funds, you can read another post of ours- https://www.wishfin.com/mutual-fund/five-best-overnight-debt-funds-to-invest-in/