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What are the Mutual Fund Debt Returns Rates?

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Created on
August 19, 2022


What’s Inside

If you are new to investing and don't know the ins and outs of the market, it’s natural to be hesitant to invest in riskier asset classes. And, because stocks are a risky asset class, you would naturally gravitate toward fixed-income securities or debt funds. Mutual funds debt fund returns historically, tend to be stable like those of fixed deposits, over a medium or long term. However, they do not guarantee returns. Mutual fund debt returns are not merely dependent on interest but on the value of the instrument as well.

So, let's learn about these mutual fund debt returns so it becomes easier for you to evaluate your return on investment.

What are mutual fund debt returns?

Beginning with the most important aspect, mutual fund debt returns are an amalgamation of two components:

The coupon or interest rate:

The coupon of a debt fund reflects the interest payable on the fixed-income security. Let’s say you purchase a five-year AAA bond, which has low chances of default and may pay you an 8.5% coupon every year till maturity for five years. This is the bond’s coupon, and you as an investor will receive the gains at predetermined intervals. 

It is important to keep in mind while selecting the bond that the interest may seem lucrative, but a high-interest rate correlates to high risk. The bond issuer compensates the investor for lending money to a high-risk stock by offering a high rate of returns. 

While gauging risk, it is also important to check the credit rating on a bond. For an investor, it is important to remember that debt mutual funds are categorised based on ratings that are assigned by credit rating agencies such as Crisil with ratings such as AAA, AA, BBB, CC etc. Investors can choose a fund based on these ratings. For instance, you purchase a fund with a AAA rating; this signals that the fund is less risky, has high quality and is a perfect investment for cautious or risk-averse investors. A fund with a CC credit rating is a weak rating and implies that this is a poor quality fund with a very high risk. 

Capital gain earned from the change in the price of the fund:

As the fund's net asset value (NAV) changes, so do the mutual fund debt fund returns. As the NAV rises, you will book a profit. Similarly, if the NAV falls, you make a loss. You should be aware that the financial products which are part of the debt fund are traded and therefore have a market value, and prices may rise and fall. 

Bond prices are subject to interest rates set by the apex bank. If the RBI reduces the interest rates of the new bonds, other fixed-income instruments will have a lower rate of interest. As a result, the existing bond prices rise as a beneficial result of high interest rates. Subsequently, this causes an increase in the NAV of the debt funds. Likewise, when the interest rates rise, it will have the opposite effect on the prices, and the NAV would reduce. 

For instance, a debt fund invests in bond A which has a coupon rate of 12%. Now the RBI reduces interest rates for new bonds in the market, let's say bond B, which offers a lower interest rate, at 10%. The demand for bond A will increase, and as a result, the NAV of the fund holding the bond would increase as well, increasing the mutual fund debt fund return. 

This process of evaluating instruments based on market pricing for calculating NAV is known as ‘mark to market.' The degree to which the return is affected by market price movements depends on the type of investments owned in the portfolio.

Apart from the RBI interest rate fluctuation, the yield, i.e. the profit earned because of the increase or decrease of the NAV, is also subject to other factors such as inflation and even GDP projections. Additionally, you can observe that when there is a surge in demand for equities, there is a low demand for bonds which causes the yield to rise. Thereby causing mutual fund debt returns to rise. 

Which are the Best Debt Mutual Funds in India?

Summing it up

You can try to diversify your investment portfolio now that you understand mutual fund debt returns. The interest rate component and the gain or loss on the instrument's value are the two sources of debt fund returns. The interest rate component is responsible for stability. Because of this, debt funds are substantially less volatile than equity funds, even though their returns cannot be foreseen, pre-specified, or projected.

If you are unsure where to invest and why, debt mutual funds might be an ideal place to begin your financial journey. Remember, among a profusion of possibilities on your distributor's shelves, select one that is best matched with your financial goals and investment aspirations. While it may be tedious to understand the mutual fund debt fund returns, investing in them is as smooth as butter with the Fi app. Just keep your goals and risk appetite in mind and invest cautiously.

Frequently asked questions

1. Which debt fund gives the highest return?

Mutual fund debt fund returns are subject to two components: interest rate or the coupon and the capital gains accrued because of the fluctuation of the bond price, which is a part of the debt fund. If you choose to get the highest return, it would also be associated with the highest risk. Additionally, external factors also influence the price of the fund. Therefore, the highest mutual fund debt return depends on your risk profile and market condition.

2. Do debt mutual funds guarantee returns?

Debt mutual funds are subject to multiple market factors such as the RBI repo rate, inflation and even GDP since their underlying assets are affected by these factors. Debt funds are safe havens for fixed-income investors since they do not see wavering interest rates, but they do not provide assured returns.

3. What is the average rate of return on a mutual fund?

Average returns are not as straightforward. For a precise computation, two factors must be included:

  1. The asset types in which the fund invests

The average mutual fund return varies substantially based on the fund's assets.

  1. The historical time period under consideration: Typically a mutual fund's performance is influenced by historical periods.

4. What are the debt mutual funds' average returns?

In reality, most funds did not achieve returns of more than 7% during one year. Low-volatile, low-duration funds, such as liquid, ultra-short-term, and partially short duration funds, consistently delivered returns of more than 6%.

5. Is debt MF better than FD?

Debt mutual funds and fixed deposits have their own advantages and disadvantages, and the better option depends on individual investment objectives, risk tolerance, and market conditions. Debt MFs offer higher returns but are subject to market risks, while FDs offer fixed returns with lower risk. Debt MFs are more liquid, but FDs may incur penalties for premature withdrawals.

6. Which debt funds are safe?

Debt funds like Gilt funds, short-term funds, Fixed Maturity Plans, etc are considered safe options.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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