Debt Funds Mutual Funds for NRIs

Debt funds offer NRIs higher returns than FDs with lower risk. Here’s why you should invest in Indian debt funds with iNRI.

May 8, 2024
5 mins read

What are Debt Mutual Funds in India?

Debt funds are mutual funds that invest across different fixed-income securities, like treasury bills, corporate bonds, commercial papers, etc. Since debt funds invest in fixed-income generating assets, they are suitable for low-risk tolerance investors. 

Debt funds mainly operate based on credit ratings. Fund managers use this factor to screen out various low-quality debt instruments. Higher debt ratings indicate that the issuer is less likely to default.

However, this does not imply that low-quality funds are bad. A few fund managers with a higher risk tolerance may invest in low-quality debt instruments to generate high returns.

Interest rates also influence the fund manager's decision, and they invest in 

  • long-term securities when interest rates are decreasing
  • short-term securities when interest rates are rising

Top Indian Debt Mutual Funds for NRIs/ OCIs in 2024

Debt Mutual Fund Information
Fund Category 3Y Return 5Y Return
Aditya Birla Sun Life Medium Term Plan Medium Duration 12.50% 8.50%
UTI Dynamic Bond Fund Dynamic Bond 10.10% 6.30%
Nippon India Corporate Bond Fund Medium Duration 6.00% 6.60%
SBI Magnum Gilt Fund PF Plan Fixed Period 1 year Government Bond 12.30% 11.10%
Baroda BNP Paribas Credit Risk Fund Credit Risk 8.90% 7.10%

Why Should NRIs Invest in Indian Debt Mutual Funds?

Debt mutual funds are an excellent alternative to fixed deposits (FDs). Instead of opting for fixed deposits, NRIs can also invest in debt mutual funds. Debt funds are more liquid and generate higher returns than FDs. Debt mutual funds are suitable if -

You are risk-averse 

Due to the lack of market volatility, investing in debt mutual funds carries lesser risk than equity funds. 

Also, returns from debt funds are pretty much predictable since you can estimate the interest rate and maturity value in advance. 

As a result, they are suitable for risk-averse investors. 

You have a short to medium term investment horizon

The maximum term of the underlying debt securities is ten years. 

However, the ideal investment horizon for debt funds is up to 3 years. These funds are a suitable alternative for fixed deposits and to park money for emergency requirements. 

You are looking for portfolio diversification

Investing exclusively in stocks or equity mutual funds might be risky. 

Having a safety cushion like debt funds in your portfolio will help minimize overall portfolio risk. Thus, debt funds can be a good investment alternative if you are seeking to diversify your investment portfolio. 

How to Select the Top Debt Mutual Funds?

Average maturity of debt funds

Before selecting any debt fund that matches your investment horizon and goals, you need to consider the fund's maturity. Not aligning your investment horizon with the fund’s average maturity will lead to unnecessary risk.

A debt scheme’s duration or maturity helps in optimizing returns at a given risk and maturity. 

For example, a liquid fund has an average maturity which ranges from a few days to one month and is the best option if you are investing money for a very short period - a few days. 

On the other hand, if you have a slightly longer investment option, say, one year, then short-term debt funds will be an ideal choice.

Macaulay Duration

When deciding on the debt fund, it's important to take into account the Macaulay Duration. This metric shows the time it will take for investors to receive payments matching the amount they paid for the debt paper.

Macaulay duration is often discussed in relation to helping investors choose the debt fund. For instance, if a fund's Macaulay duration falls between three to six months, it is suitable for investors with a three to six-month investment horizon.

Modified Duration

The performance of debt funds is influenced by changes in interest rates based on their modified duration. As interest rates go up debt funds tend to underperform and vice versa. This parameter indicates how sensitive the fund is to movements in interest rates. A modified duration suggests that fluctuations in interest rates will have an impact on the fund.

Yield to Maturity (YTM)

Interested in knowing how much your debt investment could potentially earn? Look into the Yield to Maturity (YTM) of the fund. This metric calculates the earnings if all current investments are held until maturity by the fund manager. Keep in mind that the YTM may vary as debt securities are bought and sold by the fund manager.

It's advisable to compare the funds YTM with the category average. If the fund's YTM exceeds the category average, it may be considered an excellent fund.

Credit Ratings

Apart from interest rate risk, debt funds also face credit risk. Credit ratings are assigned to debt instruments and bonds to indicate the borrower's ability to repay borrowed funds. A higher credit rating implies a low risk of default.

When considering investment options, you should look into instruments and bonds rated AAA or AA+. Like individuals, companies also receive credit ratings that reflect their ability to meet loan payment obligations. 

AAA is considered the highest credit rating achievable, indicating companies, with a likelihood of meeting their debt commitments. Consequently, these securities typically offer interest rates compared to others.

When evaluating debt funds, you must assess whether the fund is taking on too much credit risk and chasing high returns.

Prevailing Interest Rates

Interest rates play a role in the performance of debt funds, and you should carefully consider the prevailing interest rate in the economy. Understanding how interest rates influence the market and bond prices is crucial.

Interest rates and bond prices are inversely related. As interest rates rise, bond prices fall and vice versa. 

As interest rates increase older bonds within a debt fund portfolio may be negatively impacted as their value decreases. This can have implications on the portfolio returns.

In periods of rising interest rates, long-term debt funds can carry increased risks. In such cases, opting for short-term debt funds or liquid funds may be an ideal choice.

Expense Ratio

When it comes to expense ratios, the fees vary among funds. The expense ratio is the fees charged by fund managers for managing the portfolio.

The Securities Exchange Board of India (SEBI) has introduced a limit on the expense ratio that mutual fund houses can charge. For debt funds, the expense ratio can be ranging between 0.80% to 2% based on the Assets Under Management (AUM) of the fund. 

The fund’s expense ratio can impact your overall investment return. So it's a crucial factor that you must consider when selecting funds.

Taxation of Debt Mutual Funds

Capital gains from mutual funds are added to your total taxable income and taxed as per your applicable income tax slab rate. Prior to April 1st 2023, capital gains from debt mutual funds were categorised as long-term and short-term capital gains - depending on the investment holding period.

  • Short-Term Capital Gains (STCG) - If the investment holding period is less than 3 years, the capital gains are taxed as per your income tax slab rate.
  • Long-Term Capital Gains (LTCG) - If the investment holding period is greater than 3 years, the capital gains are taxed at 20% after the indexation benefit.

Thanks to the Double Taxation Avoidance Agreement (DTAA) that India has signed with more than 90 countries - your capital gains will be taxed only in one country. This means if you have already paid capital gains tax in India, you don’t have to pay tax on the same gains in your country of residence.

Invest in Debt Mutual Funds with iNRI

While it can be quite challenging to analyze hundreds of funds, iNRI’s got you covered. Explore iNRI’s Smart Investing Tool. Based on your investment preferences the tool suggests the best funds for you to invest in. 

Here’s an example of the Smart Investing Tool. For a monthly investment of Rs 1,00,000 in debt funds for a duration of 3 years and a moderate investment strategy (risk appetite), you get 

  • A list of suggested funds
  • An estimate of the potential returns at the end of the investment tenure.

smart investing tool

Based on your preferences, you can choose to opt out of any fund. The tool will automatically re-adjust the investment allocation across the remaining funds.


Debt mutual funds offer a compelling alternative to fixed deposits (FDs) for NRIs looking for stable returns and portfolio diversification. They provide greater liquidity and the potential for higher returns compared to FDs. However, you must carefully select the funds to manage your overall portfolio risk.

iNRI's Smart Investing Tool simplifies the process by considering your investment horizon and risk tolerance to recommend suitable debt funds. 

Invest right and invest smartly with iNRI’s Smart Investing Tool.

Happy Investing! 🙂

Frequently Asked Questions: NRI Repatriation

Can NRIs invest in debt mutual funds?

Yes, NRIs can invest in Indian debt mutual funds. And, the process is completely online and digital with iNRI. Open a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account and complete your KYC to start investing in Indian mutual funds.
Read - NRE vs. NRO - What's the right bank account for NRIs?

Are debt funds safe to invest in?

Debt funds invest in fixed income-generating assets like bonds, treasury bills, commercial paper, etc. Since they do not invest in equity, debt funds are not subject to market fluctuations and, hence, are low-risk investment options. Thus, compared to equity investments, debt funds are a safe investment option.

Though they are fixed-income generating investment options, debt mutual funds are subject to interest rate risk and credit risk.

Do debt funds have a lock-in period?

No, debt mutual funds do not have a lock-in period. However, there may be an exit load on some types of debt funds. For example, liquid funds have an exit load for withdrawing the investment within 7 days.

Are debt funds better than FD?

Debt mutual funds have the potential to offer higher returns than fixed deposits. FDs promise guaranteed returns (interest rate), and the investments are locked in for the tenure of the FD. 

On the other hand, debt mutual funds invest in different fixed income-generating assets and can potentially generate higher returns. Moreover, these funds do not have any lock-in period, thus providing good liquidity for the investors.

Read - NRE FDs vs Debt Mutual Funds

How will you know the credit quality of a mutual fund?

The Asset Management Company (AMC) will release the fund’s credit rating profile of all its debt mutual funds in their monthly factsheets. You can refer to the fact sheet to understand the credit ratings of the debt fund.

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