GUIDESMUTUAL FUNDS
Best Debt Mutual Funds in India 2025 - Top Performing Debt Funds
5 MIN • 
LAST EDITED BY PRANAV KARNAD ON APRIL 30, 2025.
LAST EDITED BY PRANAV KARNAD ON APRIL 30, 2025.
GUIDES LAST EDITED BY PRANAV KARNAD ON APRIL 30, 2025.
The debt fund market is popular for investors looking to earn stable returns with lower risk. Many risk-averse investors prefer the best debt mutual funds because of their potential to generate consistent returns while preserving capital. Before jumping into it, investors must be careful enough to know the opportunities and risks debt mutual funds could offer.
This guide will explore debt funds’ meaning, their various types, and the benefits they offer. This will also help you compare them to the best index funds for investors seeking diversification and steady growth.
Debt funds pool money from investors and invest it in fixed-income securities with a predetermined interest rate and maturity date. Unlike equity investments, these funds invest in debt instruments such as government bonds, corporate bonds, and treasury bills. Although the ratio of debt to equity returns is typically lower, debt funds provide stability and predictable income.
Fixed-income mutual funds in India offer steady returns with lower volatility than equity funds. This makes them ideal for conservative investors looking to preserve their capital.
Debt funds give investors higher liquidity than fixed deposits, allowing withdrawal without substantial penalties. Some short-term debt funds even offer instant redemption.
Debt funds are more tax-efficient than traditional fixed-income investments because long-term capital gains on debt mutual funds (on holdings over three years) benefit from indexation, which reduces tax on debt mutual funds and, eventually, taxable income.
Based on their duration and the type of debt instruments they invest in, here are the types of debt funds:
Liquid funds: These funds invest in short-term debt instruments with maturities up to 91 days, such as treasury bills and commercial papers. They are highly liquid and suitable for short-term cash management.
Ultra-short & short-duration funds: These funds invest in slightly longer-term debt securities (3 months to 3 years) and offer higher returns than liquid funds but with moderate levels of risk.
Gilt funds: These funds primarily invest in government bonds in India and are considered low-risk due to the absence of credit risk. However, they are susceptible to interest rate fluctuations.
Corporate bond funds: These funds invest at least 80% of their assets in high-rated corporate bonds. They offer higher returns than government securities but with relatively low risk.
Dynamic bond funds: These are actively managed funds that adjust their portfolios in response to changes in interest rates, making them suitable for investors who can tolerate fluctuating market conditions.
Credit risk funds: These funds invest in lower-rated corporate bonds that offer higher interest rates and potential returns but with increased credit risk.
Fixed maturity plans (FMPs): These are close-ended funds with a fixed tenure that offer predictable returns similar to fixed deposits but with potential tax benefits.
Debt mutual funds generate returns primarily through interest income and capital appreciation. Here's how:
Debt funds invest in fixed-income securities like government bonds, corporate bonds, and treasury bills. These instruments pay periodic interest, contributing to the fund's overall returns.
The price of bond investments in India and mutual fund interest rates have an inverse relationship—when interest rates fall, bond prices rise, leading to capital gains. Fund managers may purchase bonds at lower prices and sell them at a premium, increasing returns.
Some debt funds hold bonds until maturity, ensuring a predictable return through accrued interest. Fixed Maturity Plans (FMPs) follow this approach, reducing interest rate risk.
While the best debt funds provide stable returns, one must remember that factors like interest rate changes, credit risk, and market conditions can influence performance.
When selecting a debt mutual fund, it's essential to consider several key factors to ensure it aligns with your financial goals and risk tolerance.
The duration of your investment should match the type of debt fund you choose. If you're looking for short-term debt funds (a few months to a year), liquid or ultra-short-duration funds may be preferable for their stability and quick access. For long-term investors (3+ years), gilt or dynamic bond funds could offer higher returns over time.
While debt funds are generally considered lower risk than equity funds, they still carry risks, such as interest rate risk and credit risk. If you prefer minimal risk, gilt funds (government bonds) or highly rated corporate bond funds are safer choices.
This is the annual fee charged by the fund for management and operations. A lower expense ratio means more returns stay with the investor. Compare expense ratios of funds within the same category to find cost-efficient options.
Past performance doesn't guarantee future results but can provide insights into the fund's stability and consistency. Check how the fund has performed across different market cycles and compare it to its benchmark and peers.
By carefully evaluating these factors, you can choose a debt mutual fund that aligns with your financial goals, risk appetite, and investment timeline.
| Debt Fund Name | 1Y Return (in %) | Risk Level | Fund Size (in Cr) |
| DSP Credit Risk Fund | 22.27 | Moderately high | 206.69 |
| Aditya Birla Sun Life Credit Risk Fund | 16.62 | Moderately high | 970.72 |
| Aditya Birla Sun Life Medium Term Fund | 13.52 | Moderately high | 2185.13 |
| Invesco India Credit Risk Fund | 10.74 | Moderately high | 144.02 |
| ICICI Prudential Long Term Bond Fund | 10.06 | Moderate | 1231.6 |
| Bandhan Government Securities Fund Constant Maturity Plan | 10.00 | Moderate | 342.26 |
| Axis Floater Fund | 9.86 | Moderate | 163.82 |
| Axis Gilt Fund | 9.84 | Moderate | 897.11 |
| PGIM India Dynamic Bond Fund | 9.79 | Moderate | 103.13 |
| Bank of India Short Term Income Fund | 9.74 | Moderate | 115.02 |
Source: AMFI
Debt mutual funds are taxed based on the investment duration and are subject to capital gains tax. Here’s how:
If you redeem your debt investments before 3 years, the gains are considered short-term capital gains (STCG). STCG is taxed as per your income tax slab rate.
The 2023 Budget changed the taxation of debt mutual funds. Previously, long-term gains (held for over 3 years) were taxed at 20% with indexation benefits. Now, regardless of the holding period, these gains are taxed as per the investor's income tax slab.
Indexation is a method of adjusting the purchase price of an asset for inflation. This ensures that only the real gains on an investment are taxed, not the portion of the gains simply due to inflation.
The Income Tax Act of 1961 allows for the indexation of certain long-term capital assets, such as stocks and real estate. The Central Government notifies the cost inflation index (CII) for each financial year, which is used to calculate the indexed purchase price.
Indexed Purchase Price = (CII of year of sale / CII of year of purchase) x (Purchase cost)
Here's an example showing a taxable gain:
Assume you purchased debt mutual fund units in 2010 for ₹50 Lakh and sold them in 2023 for ₹1.8 Crore. The CII for 2010 was 100, and the CII for 2023 was 300.
The indexed purchase price would be: (300 / 100) x (₹50 lakhs) = ₹1.5 Crore
Your taxable capital gain would be: ₹1.8 crores - ₹1.5 crores = ₹30 Lakh
And your taxes, at 20% on the gains, turn out to be ₹60,000.
You can invest in debt mutual funds through different online or offline methods.
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 simplify, 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.
You can go to the platforms of Asset Management Companies (AMCs) like SBI, ICICI, and HDFC Mutual Funds and register with your KYC details. Choose a debt fund, how much you want to invest and mode of investment (lumpsum or SIP). Payments can be made via Debit Card or UPI.
Invest through brokers like ICICI Direct or bank-linked mutual fund services.
Visit the nearest AMC office. Fill out the mutual fund application form and submit your KYC documents (PAN, Aadhaar, bank details). Choose a fund, payment mode (cheque/DD), and submit the form.
Financial advisors or distributors help investors choose funds and handle paperwork. They may charge a small commission, which is added to the fund's expense ratio.
Some banks act as mutual fund distributors, allowing investments through offline forms or assisted banking.
No, debt funds have no lock-in period. This flexibility and potentially better post-tax returns make them a strong alternative to Fixed Deposits.
Some debt funds, like Overnight and Liquid Funds, have minimal risk. However, other categories carry risks such as interest rate and credit risk, so it is important to assess them carefully before investing.
The ideal D/E ratio for most companies is between 1 and 1.5, striking a balance between debt and equity.
A low D/E ratio (less than 1) indicates a company's financial security but may limit its growth potential.
A moderate D/E ratio (between 1 and 1.5) signifies a healthy balance of debt and equity.
A high D/E ratio (greater than 2) can be risky but is common in industries with significant asset holdings.
Comparing D/E ratios within the same industry is important for accurately assessing a company's financial health.
Both FDs and debt funds serve different purposes. Debt funds are better suited for long-term investments as they offer higher liquidity and the potential for higher returns. However, FDs are safer, providing guaranteed returns for risk-averse individuals prioritising stability.
