Top Debt Fund Rankings 2025: Best Risk-Adjusted Returns

A Longer-term Perspective On Risk Adjusted Returns

As we look across the risk adjusted returns of mutual fund categories, a one-year return metrics only gives a partial picture. Mutual Funds are, by default, a longer-term investment product. Hence, we look at 5-year returns this time around with CAGR returns for periods beyond 1 year. But, how exactly is the risk adjusted returns captured?

There are measures like Sharpe and Treynor, but they may not be too relevant when we are looking at fund categories, rather than individual funds. Hence, we look at range as the measure of risk / volatility and calculate the risk-adjusted returns by dividend the average 5-year returns with the range-risk factor. Here is a quick review

Generic Equity Funds: Ranked On 5-year Risk-adjusted Returns

Here is the ranking of 7 categories of generic equity funds based on market cap.

Data Source: Morningstar

Over a 5-year period, the returns are not only impressive, but even in risk-adjusted terms, the returns look very attractive. However, that could be a distorted picture as the base is the COVID year for 5 year returns and that automatically puts equity related funds at an advantage. There are some interesting findings. Multi-cap funds are on top in terms of risk-adjusted returns over 5 years, while flexi-cap funds are almost at the bottom. It shows two things. Firstly, adding small and mid-caps to the equity portfolio has reduced the risk. Secondly, a multi-cap approach has been a good way to enhance risk-adjusted returns. This is true for pure generic equity funds in India over the last 5 years.

Thematic Equity Funds: Ranking On 5-year Risk-adjusted Returns

Here is how the 11 categories of thematic equity funds rank on risk-adjusted returns.

Data Source: Morningstar

The defensive sectors like FMCG, consumption, and healthcare are right at the top in terms of risk-adjusted returns. Aggressive themes and aggressive sectoral bets have not done too great as is evident from the above table. The leaders are largely defensive, while the aggressive equity themes have been hit hard by higher risk than by lower returns.

Hybrid Allocation Funds: Ranking On 5-year Risk Adjusted Returns

Here are 5 categories of hybrid allocation funds and their rank on risk-adjusted returns.

Data Source: Morningstar

In the hybrid space, the bias is in favor of funds with a higher debt component, while the more aggressive funds rank lower in terms of risk-adjusted returns. Interestingly, that is the trend in the short term as well as over the longer term. Equity savings and dynamic asset allocation are at the bottom, while balanced allocation and conservative allocation are at the top. Here, leadership is more about lowering risk than about maximizing returns. More than a return boost, this story is more about reining in risk.

Active Debt Funds: Ranking On 5-year Risk Adjusted Returns

Here are the 14 categories of debt funds and their rank on risk-adjusted returns.

Data Source: Morningstar

Within the debt funds category, the bias is in favor of the longer tenure funds like G-Sec funds and the 10-year duration fund. At the bottom are the standard suspects like the corporate bond funds, credit risk funds and the Banking & PSU Funds. These are the funds where yields are lower and volatility risk is quite high. The funds that gained the most are the longer-term funds, which have benefited from falling bond yields in tandem with falling repo rates. However, RBI is on pause mode after cutting rates by 100 bps.

Alternate Funds: Ranking On 5-year Risk Adjusted Returns

Here are the 3 categories of alternate fund classes on risk-adjusted returns.

Data Source: Morningstar

Over the last one-year and the last 5 years, it is precious metal funds like gold ETFs and silver ETFs that have done better than all other asset classes. For long, gold has been a safe haven, and that is helping gold as an asset class. In the case of gold and silver ETFs, it is not just the returns performance but the fight for consistency. Gold and silver have corrected from recent peaks, but that may not really impact the appetite for precious metals funds!