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Debt Mutual Funds: Which are the Best Debt Mutual Funds in India?

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August 5, 2022


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Checking out the best debt mutual funds online never got this easier. With just a few taps on the Fi app, you can view the various debt funds, select your choice and begin investing in just a few minutes.

But before choosing the best mutual funds, it would be wise to understand what they are if you’re unsure about making a choice. So let’s get to it then.

What are Debt Mutual Funds?

A debt mutual fund is a type of investment that allows you to invest in fixed income assets that have the potential for capital growth, such as money market instruments, government and corporate bonds, corporate debt securities, and so on. An investment in the best debt mutual funds in India will allow you to receive financial benefits in the long term. 

These investments have multiple advantages, including a low-cost structure, strong liquidity, good financial safety, and relatively constant returns. However, in order to receive these benefits, you must be well-informed as it will help you to choose the best option. 

Features & Benefits of Debt Mutual Funds

Here is the list of features associated with best debt mutual funds. 

  1. Lowest Risk - Investment in debt mutual funds are not impacted by share market fluctuations. As a result, your investment will be at a lower risk. Furthermore, debt mutual funds invest in fixed-income assets with a predetermined interest rate and maturity value. Hence, debt funds are less risky than equity funds.
  1. Inadequate Capital Appreciation -The investment seeks to offer secure and consistent returns. They make investments in fixed-income assets that offer a consistent rate of return. Additionally, it expands through the reinvestment of interest earnings and maturity proceeds.
  1. Financial Consistency - People investing in debt mutual funds earn most of their profits from interest earned and maturity value from the underlying fixed-income assets. Since the interest rate and maturity value are both predetermined, debt funds provide a consistent and predictable cash flow without the risk of market volatility.
  1. Tax Effectiveness - Compared to conventional investing choices like fixed deposits, debt mutual funds are more tax-efficient. The interest income from FDs is taxed annually. The debt mutual funds, however, are taxed in the year you retrieve them. 
  1. High Liquidity - One of the key benefits of investing in debt mutual funds allow you to redeem your assets at any time and get your money back. 
  1. Partial Withdrawal  -If you have a financial emergency, debt mutual funds allow you to take a proportion of your funds without affecting the remaining of your investment.
  1. Portfolio Stability - Stock market volatility has less impact on the returns since a significant proportion of the financial fund is devoted to debt securities.

Taxation of Debt Mutual Funds

In debt mutual funds, a three-year minimum holding period is required for short-term capital gains. In these kinds of investments, short-term capital gains are taxed at the investor's appropriate tax rate if the units are sold before three years. As a result, the short-term capital gains tax on borrowed funds is 30% + 4% cess if your tax rate is 30%. On the other hand, debt mutual fund long-term capital gains are subject to a 20% indexation tax. 

Here’s a closer look at the taxation of debt mutual funds. 

Risks Associated with Debt Mutual Funds

Following are the details about different risks associated with these kinds of investments. 

  1. Credit Risk

Credit risk is the possibility that a borrower won't make their principal or interest payments by the specified time. Credit ratings are used to evaluate credit risk. By evaluating an organisation’s overall financial health, credit rating agencies determine its creditworthiness. The debt instruments that the mutual funds invest in have varying credit ratings. An organisation  having a  higher grade displays that it has less chance to default on any payment and vice-versa. 

  1. Interest Rate

The cost of borrowing, or interest rates, is inversely correlated with the price of bonds or fixed-income securities. If market interest rates increase, bond market prices decrease. Since they are sensitive to interest rate changes, debt funds often provide higher returns during periods of low-interest rates.

How to Choose Best Debt Mutual Funds for Investment?

Here are a few points that you must consider before investing as they will help you to select the appropriate option. 

  1. Returns on Investments

If you are planning for a long-term investment, it would be beneficial to check for stability in returns. Select assets that have regularly exceeded the standard and competitor funds across a range of time periods. To achieve good and beneficial results, ensure that you evaluate the financial position that corresponds to your investing horizon. 

  1. Check for Company’s Background

Select investment fund companies with a proven track record of reliable performance.  Make sure the company you are choosing has a consistent track record of good returns over investments. 

  1. Fund Classification

Debt mutual funds are subdivided into various categories, including monthly income plans, liquid funds, fixed maturity plans, dynamic bond funds, credit opportunity funds, short-term funds, income funds, and so on. These funds have their own importance and benefits. Hence, you must examine your needs and invest in an appropriate debt mutual fund in order to maximise your benefits.

  1. Risk Assessment

Investments in debt mutual funds are associated with several risks, such as interest rate risk and credit risk.. Since the fund's value may vary owing to changes in general interest rates, you must evaluate the different risks included in your form of investment. 

  1. Expense Ratio

It displays the percentage of your money that is used to manage the fund. The lower the expense ratio, the higher your potential returns. If two funds have identical asset allocation and returns, select the one with the lower cost ratio.

  1. Monetary Ratios

To assess an investment, you may utilise financial indicators such as sharpe ratio, standard deviation, alpha, and beta. A fund that has a greater beta and standard deviation is riskier than one that has a lower beta and standard deviation. To find investments that offer larger returns for each additional unit of risk taken, you must look for funds with a higher sharpe ratio.

  1. Financial Objectives

Debt mutual funds can be leveraged for a number of purposes, including earning extra income, enhancing liquidity or financial stability. Before doing an investment, you must ensure that it will provide you with enough financial benefits to fulfil your requirements. 

Which are the Best Debt Mutual Funds in India?

Here is the table containing details about the best debt mutual funds-

Fund Name



1 Yr Return 


Fund Size (In Cr.)

Aditya Birla Sun Life Medium Term Fund


Moderately High




Baroda BNP Paribas Credit Risk Fund


Moderately High




UTI Medium to Long Duration Fund






Sundaram Low Duration Fund


Low to Moderate 




Sundaram Short Duration Fund






Nippon India Ultra Short Duration Fund






UTI Short Duration Fund






UTI Low Duration Fund


Low to Moderate




Aditya Birla Sun Life Dynamic Bond Retail Fund






ICICI Prudential All Seasons Bond Fund







Wrapping It Up

Investing in debt mutual funds is one of the safer options to earn additional income or to save money for your future compared to riskier ones like equity funds or stocks. However, in order to receive worthwhile returns, choosing the best debt mutual funds in India can be tricky, hence comparing the benefits offered with different will help to make a wise decision. Do keep in mind your goal and time horizon to achieve this goal before taking the final call.

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Mutual Fund investments on Fi are commission-free. With its intuitive user interface, suited for novice & seasoned investors, you can select from over 800 direct Mutual Funds. Plus, Fi's 100% secure as it functions under the guidance of epiFi Wealth, a SEBI-registered investment advisor. To help simplify steps involved, you can invest daily, weekly, or monthly via automatic payments or SIPs — created with one screen tap. Moreover, Fi offers 100% flexibility with zero penalties for missed payments.

Frequently Asked Questions

1. Which is the best debt mutual fund?

There are several investment options available in the market. In order to choose the best debt mutual funds in India, you can do a comparison between debt mutual funds by comparing their features, returns and risk level. 

2. Which debt fund gives the highest returns?

Among the many debt mutual funds available, credit risk funds tend to give the highest returns. But it’s advised to do your own research before you decide to invest in such funds.

3. Are debt mutual funds taxable?

Yes, the short-term capital gains tax on debt funds is 30% + 4% cess if your income tax rate is 30%. On the other hand, debt mutual fund long-term capital gains are subject to a 20% indexation tax.

4. Is it safe to invest in debt funds?

No investment can be considered as 100% safe, that said, generally debt funds are safe to invest in. They pool in your money into fixed-income securities government bonds and corporate bonds. However, It's always advisable to thoroughly research and consult a financial advisor before making any investment decisions.

5. What is the average maturity of debt funds?

The average maturity rate of debt funds depends on the type of debt fund you choose. It can vary from a few months to years. Check whether the fund you invest in is a short term, intermediate, or long term one before making the investment.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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