Five Debt Funds that Offer Better Returns than FDs

Summary: Despite the risks, investors often find it difficult to ignore the allure of debt funds that provide higher returns than fixed deposits (FDs). This blog takes a look at five debt funds that have been lucrative for those who decided to invest in them instead of FDs.

Investors often find themselves in a dilemma, having to choose between debt funds and FDs so that they can maximise their earnings. But is it just a matter of interest rates? Well, it is just one part of it, among many other things. The intelligent investor must evaluate the features, risk-return profiles, and the suitability of financial goals to make informed decisions. Both options have their own advantages and disadvantages, making it important to consider your investment objectives, risk tolerance, and time horizon before making a decision.

Despite the risks, debt funds often offer higher returns, making it a lucrative option for those who have the appetite for it. Keen on knowing more? Let’s take a look at some debt funds that have continued to offer higher returns than FDs.

In 2016, for FDs, the average rate of returns was in the range of 8-8.5% per annum. In the last year, that has dropped to 6.6-7.5%. This indicates that returns are better for debt funds than they are for FDs.

Parameters for evaluation

The following are the indicators of performance and returns of debt funds which help in evaluating some of the best ones, including those that have given better results than FDs.

• Risk: Mutual funds offer a range of risk-return profiles based on the types of assets they invest in (equity, debt, hybrid, etc.) and investors assess these in the context of the returns they anticipate.
• Expense ratio: The expense ratio is a critical metric used to measure the cost of owning a mutual fund. It represents the percentage of a fund’s total assets that are used to cover its operating expenses. These include the various costs associated with managing the fund, such as administrative fees, management fees, marketing expenses, custodian fees, and other operational costs.
• Sharpe ratio: This is used to assess the risk-adjusted return of an investment or portfolio. It helps investors evaluate the potential return they could receive for the level of risk they are taking.
• Information ratio: This is used to evaluate the skill or value added by an investment manager in relation to a benchmark index.
• Alpha ratio: This quantifies an investment’s performance relative to a benchmark index, considering the risk taken.
• Minimum investment: This is the minimum amount an investor must put in.
• Exit load: An exit load, also known as an exit fee or redemption fee, is a fee that investors might have to pay when they sell or redeem shares of a mutual fund.
• Yield to maturity: This is the total return an investor can expect to receive for holding a fixed-income security, such as a bond, until its maturity date.
• Effective maturity: This refers to the duration during which an investment’s cash flows, including coupon payments and the repayment of principal, are received by the investor.
• Modified duration: This estimates the sensitivity of a fixed-income investment’s price to changes in interest rates.

With these established, let’s look at some of the best-performing funds that have net assets/AUM in excess of INR 1,000 crore.

Aditya Birla Sun Life Credit Risk Fund

Known previously as Aditya Birla Sun Life Corporate Bond Fund, it invests in short-medium term securities within the investment grade of the credit market. Since its launch on April 17, 2015, it has provided 7.2% in returns.

Risk	Moderate
Expense ratio	1.69
Sharpe ratio	0.38
Information ratio	0
Alpha ratio	0
Minimum investment	1,000
Yield to maturity	8.15%
Effective maturity	1 year 11 months 8 days
Modified duration	1 year 6 months 18 days

Nippon India Credit Risk Fund

Launched on June 8, 2005, this fund provides returns as well as earnings from appreciation of the capital of the portfolio. It has provided a return of 6.2% since its launch.

Risk	Moderate
Expense ratio	1.64
Sharpe ratio	1.06
Information ratio	0
Alpha ratio	0
Minimum investment	500
Yield to maturity	8.97%
Effective maturity	2 years 2 months 19 days
Modified duration	1 year 10 months 28 days

HDFC Credit Risk Debt Fund

HDFC Corporate Debt Opportunities Fund, now known as HDFC Credit Risk Debt Fund, has provided a return of 8.1% from the time of its launch in March 2014. The fund’s investments are primarily in corporate debt, ranking it ninth in the category for credit risks.

Risk	Moderate
Expense ratio	1.53
Sharpe ratio	0.14
Information ratio	0
Alpha ratio	0
Minimum investment	5,000
Yield to maturity	8.47%
Effective maturity	2 years 7 months 18 days
Modified duration	2 years 7 days

ICICI Prudential Regular Savings Fund

This fund is aimed at providing consistent returns through investments in the money and debt markets. Since its launch in December 2010, it has provided returns at an average of 8.2%.

Risk	Moderate
Expense ratio	1.54
Sharpe ratio	0.25
Information ratio	0
Alpha ratio	0
Minimum investment	10,000
Yield to maturity	8.49%
Effective maturity	3 years
Modified duration	1 year 3 months 11 days

UTI Short Term Income Fund

High-quality debt and money market securities are part of its portfolio, having generated 6.5% in returns since its launch in September 2007.

Risk	Moderate
Expense ratio	0.95
Sharpe ratio	0.31
Information ratio	0
Alpha ratio	0
Minimum investment	10,000
Yield to maturity	7.29%
Effective maturity	2 years 6 months 4 days
Modified duration	2 years 1 month 20 days

Wrapping up: Key points to remember

For those not averse to taking risks, debt funds have been lucrative and rewarding. However, the parameters listed in this blog for evaluation can help you make investments that align with your objectives, goals, and financial standing. Put them to the test and narrow down on high-yield debt funds to get investing.