What is the best debt fund to park 15 lakh Rs for 3 Years

Since you have a three year investment horizon, you can opt for long term debt funds or credit opportunities funds depending upon your risk appetite. If you have the appetite for volatility, then you can opt for long term debt funds. Long term debt funds are subject to interest rate sensitivity. If interest rates go down, then these funds will give high returns and if the interest rate goes up returns will be lower. In the current economic environment, it is likely that interest rates will go down on a structural basis. Even the RBI Governor in the last monetary policy review said that the RBI is pursuing an accommodative monetary policy and will be looking to reduce interest rates. Therefore if you have an appetite for volatility, long term debt funds are good investment opportunities over a three year investment horizon. Within long term debt funds, you can choose between gilt funds or long term income funds.

Gilt funds have a higher sensitivity to interest rates compared to long term income funds. Gilt funds invest in Government securities with varying maturities. Based on last month’s data, the average yield to maturity (YTM) and modified duration of Gilt funds are 8% and 8 years respectively. In the event interest rate goes down by 2 to 3% over the next three years, based on the average YTM and modified duration of these funds, you can get 14 – 16% returns. Needless to say, if interest rates go up, however unlikely it might be, you will get much lower returns, even less than 8%. L&T Gilt Fund, SBI Magnum Gilt fund, among others are good gilt funds.

Long term income funds also have a high sensitivity to interest rate. However interest rate sensitivity is slightly less compared to gilt funds. The average YTM and modified duration of long term income funds, based on last month’s data, are 8.5% and 5 years respectively. Please note that these are average YTM and modified durations for the different funds in the long term income funds categories. Some funds may have lower yields and higher modified duration and vice versa. If YTM and modified duration is 8.5% and 5 years respectively, and interest rate goes down by 2 to 3% over the next three years, you can get 12 – 14% returns. Like gilt funds, if interest rates go up, however unlikely it might be, you will get much lower returns. Tata Dynamic Bond Fund, HDFC High Interest Fund – Dynamic Plan, BNP Paribas Flexi Debt Fund, among others are good long term income funds.

If you do not wish to take interest rate, then you can opt for credit opportunities funds. These funds invest in corporate bonds of very high credit quality and hold them till maturity. Therefore interest rate risk is low. Based on last month’s data, the average maturity of the credit opportunities funds is around 2.5 years. Since your investment horizon is 3 years, the re-investment risk is also relatively small. The average YTM of these funds is about 9%. However, if you choose the right credit opportunities funds you can potentially get in excess of 10% returns. Franklin India Short Term Income Plan, UTI income opportunities fund among others are good credit opportunities funds.

You can choose between long term debt funds and credit opportunities for your debt portfolio. You can also choose to allocate a portion of your investment to gilt funds, a portion to long term income fund and a portion to credit opportunities fund, depending on your risk profile and investment objectives. You should discuss with your financial advisor, your investment objectives and then make your investment decision accordingly.