Debt funds are among the most popular investments to consider for your portfolio. They consist of pooled investments diversified into various financial funds, also known as mutual funds. Debt funds may comprise money market funds, bonds, equities, and other options based on your short and long-term goals. We will discuss here the best energy debt funds.
Tips on Choosing the Best Debt Funds
Debt funds are ideal for investment portfolios, and choosing the best fund options requires research and an understanding of how each fund is rated.
While many websites offer a glimpse of the top-performing investment options, you’ll get a better idea of why each fund is rated highly based on several primary factors: credit quality, risk level, capital growth potential, tax rates, dividends, applicable fees, and other items that impact the outcome of your investment.
When you select a fund, it’s essential to determine your financial goals and whether you’re looking for a high-performance, short-term fund, or a low to moderate-risk fund to build growth over the long term. There are also various risk levels to consider, depending on your investment strategy and choosing a conservative fund or an investment with solid growth potential.
Three Main Types of Debt Funds
There are three central debt funds to consider if you’re looking for a safe, conservative fund that’s not as volatile and offers solid growth. These options include liquid funds, overnight funds, and banking debt funds and provide a safe, secure way for growth opportunities without added risk.
Overnight funds mature in one day, and these securities involve treasury bills and cash or equivalent assets. Since the results are quick, and funds are held just for one day, there is no risk from interest rate fluctuations, a preference for conservative investors looking for low risk.
Liquid mutual funds provide a maturity of 91 days, which minimizes any risk from interest rate changes. These funds typically invest in money market and debt securities, including treasury bills, certificates, deposits, and commercial papers.
Banking and PSU Fund invest in instruments with various risk levels to secure the overall outcome. These include money market and debt instruments, government securities, state development, and central government loans, commercial papers, certificates of deposits, and treasury bills.
Interest Rates
Debt funds are directly impacted by the economy, especially interest rate fluctuations in the market. As interest rates increase, bond prices fall, and bonds increase when interest rates fall.
Often, bonds that have been on the market for a while, known as older bonds, are re-priced to keep them current, as many investors prefer newer bonds for investing.
If older bonds are not re-priced, they are subjected to more significant loss when interest rates increase.
Debt funds are impacted by the bonds in their portfolios due to these interest rate fluctuations, making long-term debt funds riskier when interest rates consistently rise.
It’s ideal to get familiar with interest rate trends and monitor their performance concerning debt funds and, specifically, bonds for future investing.
The Expense Ratio and Management Fees
It’s essential to pay attention to expense ratios, as a higher ratio will significantly impact the funds’ performance. Management fees, tax rates, and other expenses related to the fund are essential to review before you decide to invest.
Taxation Benefits
The length of time a fund is held directly impacts the taxation benefits. If a debt fund is held for a short time, the investor will incur capital gains tax. Debt funds held for the long term, typically one year or more, there is the potential for capital gains tax of 20% or more, including indexation benefits.
The Fund’s Duration or Average Maturity
A maturity period is a crucial tool for determining which time will yield the best results. Some investors skip this consideration, leading to unnecessary losses because a fund doesn’t perform well when the investment extends past the maturity period or is sold before its full growth potential.
Before you take the plunge and invest, always know the average maturity of a debt fund, so you can plan for earning the best return. For example, if a fund performs best in the short term, within six months or less, avoid holding the fund beyond this time frame, as there may be a loss.
Evaluate the Credit Value of the Fund
It’s crucial to check the credit quality of your debt funds, as this is a significant indication of their success and performance. A credit rating is assigned to a bond by accredited agencies based on their ability to repay the money.
The highest rating is AAA, and AA+, the next highest rating, is considered ideal for investing. When you invest in one of the highest-ranked debt funds, there’s a greater chance of security and safety overall.
AUM or Assets Under Management
Asset under management or AUM refers to all investors’ total amount invested in a specific fund. This factor should always be considered when choosing a fund, as an asset with a substantial AUM is more likely to perform well.
It’s also crucial to consider the details of the investors, as large corporate investments in a fund may lead to significant withdrawals in the future and ultimately impact the fund’s stability and growth.
The Best Energy Debt Funds of 2022
While most debt fund portfolios contain fixed-income investments, the fees are generally lower than investments considered a higher risk, such as equity funds, due to lower management costs.
There are also a variety of debt fund or mutual fund products investors can choose from, based on their financial strategies, which include generating income, increasing capital, and planning for retirement.
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Tips for Choosing the Best Energy Debt Funds
When you review each fund to include in your portfolio, it’s essential to ensure they meet a high level of performance, overall security, a good track record, and reputable management. The following criteria are essential to consider when choosing your debt fund investments:
- Stay away from debt funds that indicate a portfolio with 25% or more assets issued by private issuers
- Invest with management companies that are reputable and include high-ranking funds only, ranking AAA or AA
- Ensure you receive all the information needed to make an informed decision on your investment, including the advantages and drawbacks of the fund
- Choose a fund with a good mix of debt instruments to balance the risk level of your portfolio
- Check the history of a fund’s performance and history of interest rates
- Select a debt fund that closely matches your financial circumstance and goals so that you’re not taking on more risk than your portfolio can handle
- Choose a debt fund that includes some zero-risk instruments, such as treasury bills, government, and government or public institution-issued papers
It’s essential to get acquainted with the highest performing fund managers and companies that issue debt funds to determine which investments are a good fit for your portfolio. The most reputable fund managers will offer the top choices that consistently rank above the average and often exceed our out-perform the benchmark of other funds within the same category.
The following debt fund products are expected to offer great results, whether you’re looking for short-term growth, increasing capital, or long-term planning for ten or more years.
1. Axis Liquid Fund Retail Fund
The Axis Liquid Fund Retail is a growth-focused investment that provides investors with a high potential for earnings within the first five years. This fund’s history indicates a steady growth that aligns with inflation and consistently shows solid projections for the future.
The fund offers significant advantages for investors looking for a liquid, fast-growing investment. Axis Asset Management Company manages various mutual funds, including debt funds, equities, and hybrid funds. It’s an India-based company, with an annual return of 6.8% annually over the past 11 years.
Pros:
- The fund has a solid track record of 12 years with good results, making it a reliable investment to consider
- When interest rates change, there’s minimal impact on the fund, which means it’s relatively safe
- There’s a low credit risk, which gives you high quality in comparison to other debt funds
Cons:
- While the fund performs well and indicates a promising future, it’s considered moderate risk, which can be a bit riskier for some investors
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2. ICICI Prudential Savings Fund of Income
This income fund is considered one of the top-rated investments that offer nearly two decades of excellent performance. The income fund’s objective is short-term, with decent capital growth potential that’s safe. The ICICI Prudential Asset Management Company was set up in 1993, and the firm’s mutual fund options include 64 hybrid funds, 116 equities, and 526 debt funds.
Pros:
- The fund offers 19 years of excellent history, based on a regular analysis, which shows excellent results
- You’ll find this fund’s portfolio offers high credit quality in comparison to other debt funds
- There is a dividend option for investors
Cons:
- There’s a moderate risk associated with this fund, which may work for or against your investment portfolio, depending on your goals
- If you choose the dividend option, you’ll pay a higher tax rate when funds are withdrawn
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3. Edelweiss Government Securities Fund
The Edelweiss Government Securities fund offers steady growth, with a high rating and low to moderate risk. This fund consists mainly of bonds issued by the government of India, which means they have solid support and backing, though a few shifts in volatility due to interest rate changes. Overall, this securities fund offers a consistent growth that’s not as risky.
Pros:
- The fund is categorized in the low to moderate risk group, which is ideal for moderate to long-term growth
- There’s no tax payable provided you hold the units
- Annual growth of 5.1%
Cons:
- There is a tax rate of 20% when you sell after three years following the investment
- Dividends added to the income are taxed at 10% before they are distributed
In reviewing the performance of seven years, there’s consistent growth with minimal changes to this trend, which makes it a relatively safe investment. It’s comparable in success to other Edelweiss funds and provides a steady, reliable increase in capital.
4. Aditya Birla Sun Life Liquid Fund Institutional
This fund offers a solid and steady growth that follows inflation, so you’ll enjoy increased capital for short-term investments or a longer duration. Aditya Birla Sun Life Liquid Fund is strongly recommended for a safe increase in capital. The fund company was set up in 1994 and included 19 hybrid funds, 329 debt funds, and 83 equities.
Pros:
- The fund’s 19-year history is consistently successful in growth, which ensures investors a good return on future investment
- Aditya Birla Sun Life’s liquid debt fund produced an annual return of 6.8% over 18 years
- There’s a low credit risk, with better credit quality than other debt funds.
- Within the past year, this liquid fund has continued to grow steady
- The fund growth is a good fit for between one and four years
Cons:
- You’ll enjoy steady growth with relatively low risk, though the increase in capital is slow
- It’s not the ideal fund for investing for longer than five years
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5. ICICI Prudential Credit Risk Direct Plan-Growth Fund
ICICI Prudential’s high-risk growth fund offers a strong performance of 8.5% annually over five years, and consistently higher growth is expected based on this trend. There is a tax of 20% on returns sold before three years.
Pros:
- The fund offers higher than average returns when you invest for three to five years
- According to the fund’s performance history, there’s a higher percentage of growth towards five years of investment
Cons:
- While the projected growth in this fund is good, the annual return is lower than other high-earning debt funds
- It’s a high-risk fund with more volatility than low to moderate-risk debt funds
6. Nippon India Liquid Fund Retail
This liquid fund has offered a stellar record of growth and outstanding performance for over two decades. The Nippon India Liquid retail fund offers a steady climb in value, with little impact from changing interest rates. It’s ideal for investment for short and long-term growth. This fund was launched in 1998 and is considered low to moderate risk.
Pros:
- Strong performance history for the last 24 years, which offers a reasonable projection for future capital increase
- The fund offers high credit quality, which is better than average debt funds
- Over the past 23 years, the annual return has been 6.6%, and the fund is considered between low and moderate risk
Cons:
- While the fund performs well overall, there is the combination of some risk with moderate growth, which may not grow as other debt fund investments
7. IIFL Dynamic Bond Direct-Growth Fund
Many great reasons to invest in the IIFL Dynamic Bond fund include high returns, a low expense ratio, and high-quality ratings. The fund offers steady growth, with a moderate risk level and an above-average annual return.
Pros:
- There is an exit load of zero and a low expense ratio of 0.27%
- The fund offers high annual returns on average, specifically for one and five-year annualized returns
- This fund generates higher returns than the benchmark set by the Composite Bond Index
Cons:
- The annualized returns for three years are lower than average in this category of debt funds
8. Kotak Savings Fund
The Kotak Savings Fund is ideal for short-term growth, with a solid increase in value between one and five years. The fund is managed under the Kotak Mahindra Asset Management Company, including 26 hybrid funds, 40 equity funds, and 164 debt funds. The fund was previously called the Kotak Treasury Advantage Fund and invests in debt instruments that offer decent returns with low risk.
Pros:
- This fund offers an excellent history of growth for the past 18 years
- Changing interest rates have minimal effect on the performance of the fund
- The growth rate is 6.5%, offering strong short-term results
- The fund is a high credit quality
Cons:
- While the growth is overall good, it’s not one of the top funds for long-term results
9. Tata Liquid Fund
The Tata Liquid Fund is an excellent investment for growth, which offers a steady increase with inflation and an excellent track record for high performance. This fund was established in 2004 by the Tata Asset Management Company, with consistently decent growth and a regular stream of income, which makes it a high-performing investment.
Pros:
- The fund performs exceptionally well for investors looking to buy and hold their funds for around five years
- There’s a low credit risk and a high credit quality in comparison to other debt funds
- When interest rates change, the fund is impacted minimally, which lowers the risk of loss
- A good track record of 18 years, which indicates steady growth and capital gains
Cons:
- Long-term investment in this fund may not yield a high return, primarily when held for more than five years
10. SBI Magnum Ultra Short Duration Fund
The SBI Magnum Ultra Short Fund offers substantial growth and is recommended for investors to buy and hold funds within five years. One of the main reasons this fund is ideal for your portfolio is the performance level that stays above the benchmark, which offers excellent earning potential.
Pros:
- SBI’s fund offers a solid track record of excellent performance and a strong history of analysis that indicates an excellent opportunity for growth for 23 years
- The fund offers a low-interest rate and high credit value, with little impact on the growth and performance of this fund when rates change over time.
- A low credit risk makes this fund a worthwhile investment and has excellent growth potential.
- Low-moderate growth allows for less risk so that you can enjoy greater returns without the high or moderate-high risk of similar funds.
Cons:
- The fund contains a significant number of equities, which may change the risk factor in the future, though overall, the fund is poised to produce excellent gains.
11. HDFC Credit Risk Debt Fund
This fund is a moderate-to-high risk that offers substantial growth and excellent growth results in a short time frame. The fund offers a diverse allocation of metals, engineering, financial, and automotive industry sectors.
Pros:
- Capital gains and annual returns are higher than average for three and five-year terms than other funds within this category. The three-year annualized rate of 9.26% offers excellent growth potential.
- There’s a low expense ratio
- The fund is a moderate-high risk, so you’re more likely to see high returns
Cons:
- If you invest in this fund for one year, the annual return is lower than average funds in this category
12. ICICI Prudential Savings Income Fund
This top-ranked fund offers a relatively safe investment option for growing capital that closely follows inflation and provides excellent results for investors looking for the maturity of around five years. ICICI Prudential’s Savings Income Fund includes a dividend option.
Pros:
- The fund’s history indicates a strong performance over the past nine years based on analysis and the fund’s track record
- Low credit risk and high credit quality create a good combination for safe, secure investing.
- You’ll have the option of dividends with this fund
Cons:
- Dividends are not generally recommended for this fund, as they are taxed higher than the withdrawal rate.
- While the fund indicates a stellar record for the past nine years, some investors may want to invest in a fund with more history
- The fund offers a moderate interest rate risk, which means there may be a significant, though not severe, impact on the fund’s performance based on changing interest rates.
13. ICICI Prudential All Seasons Bond Fund for Direct-Growth
This moderate-high risk fund offers excellent growth potential with a moderate-to-high risk level. The fund offers an allocation of financial, construction, and other industries. ICICI Prudential offers a great selection of high-performing funds, and this investment is ideal for exceptional growth potential for a three-year term.
Pros:
- The fund is ideal for excellent growth for the long term, offering a great history of fund returns for three, five years, and longer.
- If you invest for a shorter term, there’s also potential for significant growth
Cons:
- A level of moderate-high risk may impact the performance of the fund
14. Aritya Birla Sun Life Liquid Discipline Advantage Plan
The Aritya Birla, Sun Life fund, is a high-ranking option for investors looking for solid growth over a reasonable time frame. This fund’s track record offers an annual return of 6.8%, considered moderate risk, and was previously named the Aditya BSL Cash Plus DAP Gr.
Pros:
- The fund offers safe capital growth that’s consistent with inflation and offers the potential for great results with one to five-year terms or longer
- There’s a solid 13-year track record of excellent performance
- You’ll enjoy a low credit risk and high credit quality in comparison to other debt funds
- A low-interest rate risk offers minimal changes or impact when rates change over time
Cons:
- The asset allocation holding are not clearly defined, though the fund’s excellent performance is consistently positive
- While the fund is relatively safe and indicates a history of good performance, the overall growth may not be as high as other funds in this category in the long term.
15. LIC MF Banking and PSU Debt Fund
The LIC MF Banking and PSU Debt fund focus on generating income and growing capital by investing funds in money market securities and high-quality debt securities issued from various financial institutions, including banks, municipal bonds, and public sector institutions. The fund’s portfolio offers a variety of assets, including commercial, corporate debt, treasury bills, government securities, and cash.
Pros:
- To date, the fund offers a strong history of solid performance and growth, with consistently good returns
- The fund was launched in 2007, offers a high AUM score and track record of performance
- There’s no exit load
Cons:
- The risk level is low-moderate and may change or slow growth in the future
16. Sundaram Banking & PSU Debt Fund
This fund was launched in 2004 and is managed by the Sundaram Mutual Fund. The objective of this fund is to invest in municipal bonds, financial companies, banks, and public sector institutions.
Pros:
- The fund indicates consistent growth every year, including moderately high returns
- Debt instruments included in this fund offer steady, and stable growth with future potential and security
Cons:
- Growth is stable and consistent, though it may not provide high returns that some investors prefer
17. IDFC Low Duration Fund
The IDFC Low Duration fund offers investors a good track record of solid performance and safe capital growth. This fund was launched in 2006 and offers 6.5% annual growth for five years.
Pros:
- The fund offers a solid history of good performance over the past 16 years since its launch.
- Provides a good option for short-term savings for investors
- It’s a low-moderate risk and safe fund
- The fund offers a low credit risk and high credit quality, which performs better than other funds within the same category
Cons:
- While the fund’s performance is excellent overall, the growth may be slower for investors looking for a high yield within a shorter time frame.
- It’s designed for a short-term duration and is not recommended for investors looking to hold a fund for long-term growth
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