Low-Risk Debt Funds for Your Watchlist

#2 ICICI Prudential Ultra Short Term Fund

Second is ICICI Pru Ultra Short Term fund.

If you move one notch up the duration ladder, you get ultra short duration funds, which SEBI mandates to hold a portfolio with duration between three and six months.

That is still short enough to limit interest-rate risk sharply, but long enough to pick up a bit more yield than a liquid fund typically offers.

ICICI Prudential Ultra Short Term Fund, managed by Manish Banthia and Ritesh Lunawat, runs an AUM of Rs 159.74 bn (Rs 15,974 crore) at a direct-plan expense ratio of 0.34%.

Its 1-year absolute return of 6.65% has outpaced the CRISIL Composite Bond Index's 3.96% by a wide margin.

That said, the benchmark itself runs a longer average duration and is arguably not the closest comparison for a fund built to stay this short.

The consistent outperformance across every time frame shown above is what separates this fund.

#3 Kotak Banking and PSU Debt Fund

Third is Kotak's Banking and PSU debt fund.

Banking and PSU debt funds take a different route to low risk. SEBI requires them to put at least 80% of assets into debt instruments of banks, public sector undertakings, public financial institutions, and municipal bonds, entities that either enjoy implicit government backing or answer to tighter regulatory oversight than the average corporate issuer.

The category manages duration risk too, but issuer quality is the bigger lever.

Kotak Banking and PSU Debt Fund, run by Deepak Agrawal and Dharmesh Thakar, holds Rs 49.37 bn (Rs 4,936.81 crore) in AUM at a 0.34% direct-plan expense ratio.

Its portfolio leans heavily on public-sector banks (41.99% of holdings) and top-rated corporate debt (76.05%), with names like Power Finance Corporation, National Bank for Financing Infrastructure and Development, and Power Grid Corporation among its larger positions.

All these are CRISIL AAA rated.

The fund's 6-month return fall behind benchmark by a shade, while its 1-year, 2-year, and 3-year numbers are all ahead.

#4 ICICI Prudential Corporate Bond Fund

Last is ICICI Pru Corporate Bond fund - the category which carries the longest duration of all.

Corporate bond funds sit at the higher-duration, higher-credit-focus end of this group. SEBI requires at least 80% of the portfolio in AA+ and above rated corporate bonds, which keeps credit risk contained.

However, these funds are typically willing to hold longer-maturity paper than a banking and PSU or ultra short fund, which makes them more sensitive to interest-rate moves in either direction.

ICICI Prudential Corporate Bond Fund is the largest of the four by a wide margin, at Rs 296.88 bn (Rs 29,688 crore) in AUM, managed by the same Manish Banthia and Ritesh Lunawat pair behind the Ultra Short Term Fund.

It carries a 0.37% direct-plan expense ratio. Its benchmark is the CRISIL 10 Year Gilt Index, a longer-duration government bond index.

The gap between fund and benchmark here is the widest, partly a function of the benchmark itself. A 10-year gilt index carries meaningfully more interest-rate risk than this fund's actual portfolio, which caps a large share of its holdings in AA+ and above corporate paper.

Conclusion

None of these four funds are a substitute for each other.

Union Liquid Fund suits money you might need at short notice. ICICI Prudential Ultra Short Term Fund suits a slightly longer holding period. Kotak Banking and PSU Debt Fund suits an investor who wants to lean on issuer quality, banks and government-backed entities. ICICI Prudential Corporate Bond Fund suits someone willing to accept more interest-rate sensitivity in exchange for the return pickup that comes with holding duration.

The common thread between them is that low risk in debt funds is not a single dial. It is a combination of how long the fund is willing to wait to get paid back, and how confident it is in the entities it lends to.

These four make that trade-off differently, and are worth tracking for exactly that reason.

Happy Investing.

Disclaimer: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, enlistment as RA and IA with Exchange and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.