Which are the best performing debt funds of 2020

Top Gilt, long duration, corporate bonds churn out double-digit returns in a year marred by unprecedented shut-down of schemes

Staff Writer   /   January 12, 2021
Debt Fund

In 2020, Indian debt markets have witnessed a good rally with many funds with clean portfolios and no credit risk event delivering reasonable returns. Debt funds with higher duration delivered even higher returns as long bond yields, particularly G-Sec yields, returned higher capital gains as yields declined on consistent rate cuts by the Reserve Bank of India. Here are the best performing debt funds of 2020 as per each category. We have excluded categories with a low number of peer schemes. The returns mentioned below are for open-ended funds and regular option.

Overnight category

Overnight funds are debt funds that lend to corporates for 1 business day. These are the safest debt funds that can be used for parking money for a few days. Zero-risk means you have to settle for low returns as is evident with the 2020 category average of 3.31%. 

The 3 best overnight fund performers of 2020 are:

  • • Edelweiss Overnight Fund 3.53%
  • • DSP Overnight Fund 3.47%
  • • PGIM India Overnight Fund 3.46%

Liquid category

Liquid funds are debt funds that lend to companies for a period of up to 91 days. These are one of the safest funds amongst all the mutual fund categories, owing to their extremely low lending duration. But the near-zero risk of loss for someone if they invest for at least one month means a 3.93% category average of 2020. 

The 3 best performers among liquid funds are:

  • • Quant Liquid Plan 4.94%
  • • IDBI Liquid Fund 4.52%
  • • Franklin India Liquid Fund – Super Institutional Plan 4.32%

Ultra short duration category

Ultra short duration funds are debt funds that lend to companies for a period of 3 to 6 months. They are low-risk funds owing to their low lending duration. So, they are slightly above liquid funds in the broad risk spectrum. The 34-fund category has a 2020 average return of 4.4%.

The 3 best performers among ultra short duration funds are:

  • • Aditya Birla Sun Life Savings Fund – Retail Plan 7.00%
  • • ICICI Prudential Ultra Short Term Fund 6.52%
  • • HDFC Ultra Short Term Fund 6.38% 

Low duration category

Low duration funds are debt funds that lend to companies for a period of 6 to 12 months. They are into relatively longer lending duration, making them a little more volatile than Liquid Funds or Ultra Short Duration Funds. The 40-fund low duration category delivered an average of 4.87% in 2020.

The 3 best performers among low duration funds are:

  • • JM Low Duration Fund 26.70%
  • • ICICI Prudential Savings Fund 8.56%
  • • BNP Paribas Low Duration Fund 8.30%

Money market category

Money market funds are debt funds that lend to companies for a period of up to 1 year. These funds can generate higher returns while keeping risk under control through adjustment of lending duration. The 23-fund money market fund category delivered an average of 5.64% in 2020.

The 3 best performers among money market funds are:

  • • Aditya Birla Sun Life Money Manager Fund 6.62%
  • • HDFC Money Market Fund 6.50%
  • • Edelweiss Money Market Fund – Institutional Plan 6.41%

Short duration category

Short duration funds are debt funds that lend to companies for a period of 1 to 3 years. The 33-fund short duration category posted an average of 8.23% in 2020.

The 3 best performers among short duration funds are:

  • • Aditya Birla Sun Life Short Term Fund 11.03% 
  • • HDFC Short Term Debt Fund 10.93%
  • • ICICI Prudential Short Term Fund 10.62%

Medium duration category

Medium duration funds are debt funds that lend to quality companies for 3 or more years. The longer tenure of medium duration fund loan means the returns are subject to the interest rate changes that borrowing companies may undergo. The 22-fund category of medium duration schemes reported a low 3.83% average for 2020. This was due to as many as 7 peers clocking negative returns for 2020.

The 3 best performers among medium duration funds are:

  • • SBI Magnum Medium Duration Fund 12.23% 
  • • Tata Medium Term Fund 11.39%
  • • BHARAT Bond ETF – April 2023 10.99%

Medium to long duration category

These debt funds lend to corporates for a duration of 4-7 years. They have a higher risk than medium duration funds. The longer lending horizon makes them extremely vulnerable to changes in interest rates. The 14-fund category of medium to long duration schemes clocked an average of 10.04% for 2020, one of the highest.

The 3 best performers among medium to long duration funds are:

  • • Aditya Birla Sun Life Income Fund 12.77%
  • • Kotak Bond Fund 12.22%
  • • IDFC Bond Fund Income Plan 11.74%

Long duration category

Long duration funds are debt funds that lend to quality companies for 5 or more years. The tenure means that investment is more or less exposed to the entire economic cycle and so is riskier than other debt funds. The year 2020 was fantastic for long duration funds with a 12.61% category average, the highest among all debt funds.

The 3 best performers among long duration funds are:

  • • Nippon India Nivesh Lakshya Fund 13.39%
  • • BHARAT Bond ETF – April 2030 13.11%
  • • BHARAT Bond FOF – April 2030 12.94%

Dynamic bond category

Dynamic bond funds are debt funds that ‘dynamically’ manage the lending duration. The 32-strong dynamic bond category posted an average 8.24% return in 2020. 

The 3 best performers among dynamic bond funds are:

  • • IDFC Dynamic Bond Fund 12.91%
  • • Axis Dynamic Bond Fund 12.30%
  • • DSP Strategic Bond Fund 12.29%

Corporate bond category

Corporate bond funds are debt funds that lend at least 80% of their money to companies with the highest possible credit rating. The 23-fund category posted a respectable 8.82% average in 2020, among the best. The category average would have been higher if not for the negative returns for one fund and less than 3% positive return in another.

The 3 best performers among corporate bond funds are:

  • • L&T Triple Ace Bond Fund 12.35%
  • • Aditya Birla Sun Life Corporate Bond Fund 11.86%
  • • HDFC Corporate Bond Fund 11.78%

Credit risk category

Credit risk funds are debt funds that lend at least 65% of their money to not-so-highly rated companies. Although these funds are said to lend mostly for a short duration, they are still one of the riskiest in the category. This was quite evident in 2020. The 22-strong fund category notched up minus 1.83% average, as 9 funds posted negative returns. At least 4 credit risk funds posted double-digit losses in 2020. 

The 3 best performers among credit risk funds are:

  • • HDFC Credit Risk Debt Fund 10.88%
  • • ICICI Prudential Credit Risk Fund 9.76%
  • • SBI Credit Risk Fund 9.75%

Banking and PSU category

Banking and PSU funds are debt funds that lend only to banks and public sector companies. The high quality of borrowers means the risk of default is very less. The 21-fund category reported a handsome 9.75% gain in 2020. 

The 3 best performers among Banking and PSU debt funds are:

  • • Edelweiss Banking and PSU Debt Fund 12.88%
  • • Nippon India Banking & PSU Debt Fund 10.90%
  • • IDFC Banking & PSU Debt Fund 10.90%

Gilt category

We have included both gilt funds and gilt funds with a 10-year constant duration. There are 38 funds in total. The 2020 category average for the 38 funds was a high 11.20%, which indicates the kind of gains made by these funds considering they invested in government securities!

The 3 best performers among gilt funds are:

  • • IDFC Government Securities Fund – Investment Plan 13.64%
  • • Edelweiss Government Securities Fund 13.58%
  • • ICICI Prudential Constant Maturity Gilt Fund 13.56%

Floater category

Floater funds are debt funds that invest at least 65% of their money in floating-rate bonds. The interest these bonds pay changes with the movement in the interest rates in the economy. The 8-fund category posted an average rise of 8.96% in 2020, quite a hefty return. 

The 3 best performers among the floater fund category are:

  • • Nippon India Floating Rate Fund 11.28%
  • • Kotak Floating Rate Fund 11.18%
  • • ICICI Prudential Floating Interest Fund 9.45%

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