DEBT FUNDS invest in fixed-income securities such as bonds, focusing on generating regular income and preserving capital, typically carrying lower risk compared to equity funds. A potent avenue for wealth accumulation, such funds are essential for balancing investment portfolios, shielding against market risks, and providing stable returns.

1) Long Duration

THE TOP-PERFORMING FUND in this category — SBI Magnum Gilt Reg Gr, which has a mandate to invest only in government securities (Central government or state development loans), delivered average one-year rolling returns of 7.05%. The scheme maintained a higher duration when rates were relatively high, says Rajeev Radhakrishnan, chief investment officer (CIO), fixed income, SBI Funds Management. “We took an opportunity to increase our duration in every uptick in yields. Since we were fundamentally positive on interest rates, it helped us as rates softened, abetted by a strong fiscal position of the Central government along with positive liquidity in the system.” Meanwhile, ICICI Pru All Seasons Bond Gr, which ranked second in the category with one-year average rolling returns of 6.79%, benefitted from an accrual strategy and keeping a medium duration. “The accrual strategy paid off due to consistent upgrades in the credit sector and spread compression across the credit space,” says Manish Banthia, chief investment officer, ICICI Prudential AMC.

Meanwhile, SBI Dynamic Bond Reg Gr grabbed the third spot, with one-year average rolling returns of 6.73%. Radhakrishnan, who also manages SBI Dynamic Bond, says while his strategy was guided by a medium-term macro view on interest rates, the overall approach was to remain alert to tactical opportunities. “We believe in positioning aggressively as and when we are fundamentally positive or negative on interest rates. Remaining nimble on positions and views helped us generate better risk-adjusted outcomes.” DSP Gilt fund also featured among the top five with one-year average rolling returns of 6.47%. According to fund manager Shantanu Godambe, the fund has benefitted from a favourable macroeconomic scenario, including controlled fiscal environment, falling core inflation and solid demand. “While we take a strategic view, we also maintain agility in the fund. We’re not averse to reflecting our view in the fund and to take risks, coupled with prudent risk management. Thus our fund has done well across rate cycles. We run a duration of 11.5-12 years in current markets, but will not hesitate to cut if the market turns,” says Godambe.

2) Short Duration

SHORT DURATION FUNDS invest in debt and money market instruments with a Macaulay duration of 1-3 years. Macaulay duration is the weighted average of the time to receive cash flows from a bond. ICICI Pru Short Term Gr was the top-performing fund in the category with average annual rolling returns of 6.64%. Short-term funds, being inherently dynamic, allow for exposure to AA-rated instruments, unlike corporate bond funds, says Manish Banthia, chief investment officer, fixed income, ICICI Prudential AMC. “The fund adopted a nimble and tactical approach, actively trading across segments, including government securities, to maximise opportunities. This agility and tactical trading in the short-duration market played a key role in generating alpha (excess returns earned on an investment above the benchmark return when adjusted for risks) for the fund this year,” he says.

The second spot went to ICICI Pru Banking & PSU Debt Gr with one-year average rolling returns of 6.46%. Banthia says the fund maintains a high-quality portfolio and manages duration depending on the business cycles. “In 2024, we’ve been comparatively more aggressive as absolute yields were very low in FY22. This year, absolute yields were relatively attractive, which is why we ran a duration of 2-2.5 years compared to 1-1.5 years in FY22.”

Aditya BSL Short Term Reg Gr, with average annual rolling returns of 6.09% came in third in the category. Mohit Sharma, senior fund manager, Aditya Birla Sun Life AMC, says a bullish view on rates and tactical trades based on supply demand mismatch and spreads worked for the fund during the year. “Government fiscal deficit was on the downward path and the borrowing was lower than last year. Demand supply of government bonds was favourable due to additional demand from the index inclusion-related flows,” says Sharma, adding, the fund was, therefore, run on an overweight duration during the year. Axis Strategic Bond Gr, managed by Devang Shah, head, fixed income, Axis Mutual Fund, and UTI Short Duration Reg Gr, managed by Sudhir Agarwal, executive vice president and fund manager, UTI Mutual Fund, were also among the top performers in the category this year.

3) Ultra-Short Duration

WITH AVERAGE ROLLING returns of 6.64%, Nippon India Money Market Gr grabbed the top spot in the ultra-short duration category, which includes ultra-short duration, low duration and money market funds. Vikash Agarwal, senior fund manager, fixed income, Nippon India Mutual Fund, says the fund actively manages the maturity profile and asset allocation, ensuring a good balance between the two main drivers of returns, carry and mark to market. In 2024, he says, active trading across the segment and maintaining a relatively higher duration worked well till October, but the fund’s performance was impacted in November post the U.S. election as a result of a global sell-off in rates, which impacted emerging market currency and domestic liquidity. “However, post extremely low GDP data in Q2, the possibility of rate cut, and liquidity measures have increased substantially. This will aid in superior risk-adjusted returns, given the relatively higher duration positioning of the fund,” says Agarwal.

UTI Money Market Reg Gr took the second spot in the category, with average rolling returns of 6.63%. According to Amit Sharma, fund manager, UTI MF, the fund’s active management style under volatile market conditions has helped it perform relatively well. “We focus on generating alpha through active management, we try to take advantage of idiosyncratic opportunities across the curve through analysis of duration, credit spreads and yield curve structure,” says Sharma. The fund more than doubled its duration in March 2024 to 283 days from 108 days in January, to take advantage of higher yields, but reduced the duration by June anticipating a prolonged pause from the RBI given sticky inflation.

Meanwhile, Aditya BSL Money Mgr Reg Gr grabbed the third spot with average annual rolling returns of 6.63%. Kotak Money Market Reg Gr fund, managed by Deepak Agrawal, CIO, fixed income and head, product, Kotak Mahindra Mutual Fund, was also among the top performers this year. According to Agrawal, with a rate cut on the cards, for the next one year, investors who have a 60-day-plus investment horizon should continue to prefer money market, ultra short and lower liquid schemes. “If a customer has a relatively higher time horizon, say four to five months, we would even expect them to look at categories such as low duration over money market and ultra short,” he says.

4) Corporate Bond

ICICI PRU CORPORATE BOND GR, which claimed the top spot for the second year in a row in the category, posted average rolling returns of 6.69% last year (2024). According to Manish Banthia, chief investment officer, ICICI Prudential AMC, the fund’s strategy centres on maintaining a relatively higher yield to maturity (YTM) while focusing on the most attractive segments of the yield curve. “To further enhance returns, the fund selectively invested in AAA-rated NBFC assets and pass-through certificates, ensuring both safety and reasonable yields,” he says.

The second best-performing fund in the category was Nippon India Corporate Bond Gr, with one-year average rolling returns of 6.43%. Vivek Sharma, fund manager, fixed income, Nippon India Mutual Fund, says the fund started changing its positioning from 85% to 100% AAA portfolio from January 2023. “The tightening cycles had started and we were close to the peak of the rate hike cycle... We started increasing the duration of the portfolio as rate cuts help longer-end bonds because of higher durations, and AAA and sovereign bonds tend to benefit first. This strategy has helped us in the last year as we have been running a good mix of corporate and sovereign bonds in this portfolio,” says Sharma.

The Centre has maintained a disciplined approach on fiscal deficit, a positive factor for fixed income markets, adds Sharma. “Both fiscal and monetary policies have played a crucial role in defining the macroeconomic environment in India. To continue over the next 12-24 months, the quantum of rate cuts would be dependent on the slowdown in growth, which we need to evaluate over the next three-six months.”

Meanwhile, Aditya BSL Corporate Bond Reg Gr, which ranked third, posted average rolling returns of 6.4%. Kaustubh Gupta, co-head, fixed income, Aditya Birla Sun Life AMC, highlights that interest rates are expected to be lower over the next 12 months and it’s a good opportunity for investors to look towards increasing their allocation to fixed income. “For long-term investors we would advise 2-5 year allocation though corporate bond funds, short term and banking PSU funds. For tactical players looking for index inclusion impact, we propose to increase allocation to G-Secs. For cash deployment strategies, ultra-short-term funds and low-duration funds continue to make sense.”