Debt funds to watch out for

Indian retail investors have always shied away from investing in debt instruments and have preferred a fixed deposit over any other form of investment in fixed income instruments.

Debt Funds are essentially mutual funds that invest primarily in debt instruments. Short term Debt Funds are those funds that invest in short term debt instruments. Shorter the tenure of the debt instruments, safer the funds are considered to be.

When compared to fixed deposits in a bank , investing in debt instruments can be little risky as investors may lose money as the returns are linked to interest rate movements. What one should keep in mind is the traditional, high risk-high returns phenomenon.

Lowering the interest rate environment is great for bonds and other debt instruments, which are held by Debt Mutual Funds. The bond values go up when interest rates dip lower, and hence the NAV for the Debt Mutual Funds shoots up in such an environment.

Indiabulls Short Term Fund; and HDFC Banking & PSU Debt Fund are amongst the best performing short term Debt Funds that investors can bank on. Over a 1 year period both the funds have managed to deliver over 10 per cent returns.

Investors willing to accept additional risk should look at Debt Mutual Funds with a time span of 1 – 2 years and expect to make higher returns compared to the fixed deposits.