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5 Best Debt Mutual Funds Better Than Bank FDs

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The only way to find out which investment option is right for you is to do a side-by-side comparison. You invest an amount of money in an FD account for a set period of time in order to seek guaranteed returns and seek tax benefits. On the other hand, a form of investment vehicle draws funds from a variety of investors and invests them primarily in debt instruments. Debt funds are better than equity funds because the underlying securities of debt funds are mainly bonds, government securities, money market instruments, commercial papers, and other debt-related securities. Both debt funds and fixed deposits are available in a number of options to accommodate a variety of financial targets. However, considering the prevailing low interest rates on bank FDs, we've put together a list of the top 5 debt mutual funds that have delivered attractive returns over the last three to five years.

IDFC Government Securities Investment Plan Direct Growth

IDFC Government Securities Investment Plan Direct Growth

IDFC Government Securities Investment Plan Direct Growth is a debt scheme of IDFC Mutual Fund. The fund currently has Rs 1,569 crore of asset under management (AUM) and a NAV of Rs 28.92 as of 26 March 2021. The IDFC Government Securities Investment Plan Direct Growth is a moderate-risk investment with a minimum SIP of Rs 1000 and a lumpsum investment of Rs 5000. This fund has generated 11.67% and 10.18% returns across 3 to 5 years.

SBI Multi Asset Allocation Fund Direct Growth

It is an open-ended fund that invests in equities, debt, and gold-related instruments including ETFs. The SBI Multi Asset Allocation Fund Direct Growth fund currently has an AUM of Rs 317 crore and a NAV of Rs 34.93 as of March 26, 2021. This fund is in the high-risk category, but it has a 5-star score and requires a minimum SIP of Rs 500 and a lump-sum contribution of Rs 5000. The portfolio allocation across industries includes sovereign, exchange traded funds, consumer goods, financial services, pharmaceuticals, IT and so on. For units more than 10% of the investment, a 1% redemption fee will be charged if redeemed within 12 months. The 3 years and 5 year returns of this fund are 9.25% and 9.65%, whereas the 1-year returns is 28.96%.

ICICI Prudential Short Term Fund Direct Plan Growth
 

ICICI Prudential Short Term Fund Direct Plan Growth

An open-ended short term debt scheme that invests in instruments with a Macaulay period of between one and three years. The ICICI Prudential Short Term Fund Direct Plan Growth fund currently has an AUM of Rs 23,715 Cr and a NAV of Rs 48.46 as of March 26, 2021. This fund has a moderate risk rating, and the minimum SIP investment is Rs 1000, whereas the lumpsum investment is Rs 5000. The fund has generated 12.02%, 9.14% and 9.08% returns over the last 1 year, 3 years and 5 years respectively.

SBI Magnum Medium Duration Fund

By investing in debt and money market instruments, this scheme has produced attractive returns with a moderate level of liquidity, with the portfolio's Macaulay period range from 3 to 4 years. SBI Magnum Medium Duration Fund is for investors looking for a regular income for medium term and want to invest in debt and money market instruments. SBI Magnum Medium Duration Fund currently has an AUM of Rs 7,996 crore and a NAV of Rs 41.45 as of 26 March 2021. The minimum SIP contribution is Rs 500, with a lumpsum investment of Rs 5000. For units worth more than 8% of the investment, a 1.5 percent redemption fee will be charged if redeemed within 12 months. This fund has generated returns of 9.83% and 10.37% over the last 3-5 years and the 1-year return of the fund is 11.95%.

Kotak Dynamic Bond Fund Direct Growth

Kotak Dynamic Bond Fund Direct Growth

The Scheme's investment goal is to maximise returns by actively managing a portfolio of debt and money market securities. As of March 26, 2021, Kotak Dynamic Bond Fund Direct Growth has an AUM of Rs 2,681 crore and a NAV of Rs 30.50. A minimum SIP of Rs 1000 and a lumpsum investment of Rs 5000 are required by this fund. Debentures and Bonds, Government Dated Securities, Public Sector Undertakings, and Treasury Bills cover this fund's portfolio. This fund has no exit load and has generated 10.01% returns across the last 3 years and 9.68% across the 5-years. Whereas the 1-year returns of this fund 11.40%.

1-5 Year Returns

1-5 Year Returns

Funds 1 year returns 3 year returns 5 year returns
IDFC Government Securities Investment Plan Direct Growth 9.32% 11.67% 10.18%
SBI Multi Asset Allocation Fund Direct Growth 28.96% 9.25% 9.65%
ICICI Prudential Short Term Fund Direct Plan Growth 12.02% 9.14% 9.08%
SBI Magnum Medium Duration Fund Direct Growth 11.95% 9.83% 10.37%
Kotak Dynamic Bond Fund Direct Growth 11.40% 10.01% 9.68%
Taxation

Taxation

Short-term capital gains in debt funds must be kept for at least three years. Short-term capital gains in debt mutual funds are taxed at the investor's marginal tax rate if units are sold before three years. The mutual fund is required to subtract a 29.12 percent dividend distribution tax (DDT) which initialises the final dividend payment to an investor. Long-term capital gains from debt funds are taxed at a rate of 20% with indexation and 10% without indexation if you redeem your shareholding after 3 years. The interest you receive on an FD, on the other hand, is added to your net income and taxed at the effective slab rate. If the interest received in a year crosses Rs. 40000 for general citizens and Rs. 50000 for senior citizens TDS is deducted by the bank. The deposit amount, which is restricted at Rs. 1.5 lakh, is completely exempted from tax under Section 80C if you invest in a 5-year tax-saving FD.

Our take

Our take

When it comes to determining which investment strategy to select, risk is probably the most important aspect to consider. FDs provide investors with guaranteed returns, and the calculated interest you receive does not rely on market volatility. As a result, the risk is minimal. Since debt funds invest in fixed-income securities investors may need to consider some risk on returns because they are market-based. Fixed deposits and debt funds give different returns, just as they do in terms of risk. The returns on FDs are normally dependent on the tenure you select and the type of depositor you are. Hence, some leading banks of India such as SBI, HDFC, Axis and ICICI Bank are providing interest rates of 2.9 to 5.4%, 2.5 to 5.5%, 2.5 to 5.75% and 2,5 to 5.35% across a tenure of 7 days to 10 years. The primary aim of a debt fund is to provide regular income to investors over the duration of the investment period. As a consequence, you must pick a holding period that relates to your financial goal. One advantage of fixed deposits is that market highs and downs have no influence on the returns you get. Consequently, during periods of low interest rates in the economy, debt funds have outperformed fixed deposits by higher returns. Finally, consider your risk profile, tax bracket, deposit period, and investment priorities while making your personal finance decision.

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