Best Debt Mutual Funds

Debt Funds

Debt funds offer investors a low-risk investment option by investing in fixed-income securities such as bonds, potentially providing a stable income stream and capital preservation while also diversifying investment portfolios.
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Insights on Debt Funds

Performance vs. Banking And Psu and Dynamic Bond Funds

Debt Funds
Banking And Psu Funds
Dynamic Bond Funds
  • In the last 1 year, corporate bond funds have underperformed both banking and psu funds and dynamic bond funds
  • In the last 3 years, corporate bond funds have underperformed both banking and psu funds and dynamic bond funds
  • In the last 5 years, corporate bond funds have underperformed both banking and psu funds and dynamic bond funds

Top Debt Funds by Net Inflow

  • SBI Liquid Fund Direct Plan Growth has seen net inflow of ₹11508.9 Cr in the last 6 months in the debt s funds category
  • HSBC Liquid Fund Growth Direct has seen net inflow of ₹9505.7 Cr in the last 6 months in the debt s funds category
  • ICICI Prudential Corporate Bond Fund Direct Plan Growth has seen net inflow of ₹6241.7 Cr in the last 6 months in the debt s funds category

Bottom Debt Funds by Net Outflow

  • Nippon India Overnight Fund Direct Growth has seen net outflow of ₹5459.2 Cr in the last 6 months in the debt s funds category
  • UTI Overnight Fund Growth- Direct has seen net outflow of ₹4911.5 Cr in the last 6 months in the debt s funds category
  • ICICI Prudential Overnight Fund Direct Growth has seen net outflow of ₹4729.2 Cr in the last 6 months in the debt s funds category

Top Holdings of Debt Funds

# of Funds
Total Investment Value
7.38% Govt Stock 2027 (Bond - Govt/Treasury)
7.38% Govt Stock 2027 (Bond - Govt/Treasury)
141 out of 427 debt funds funds
7.26% Govt Stock 2032 (Bond - Govt/Treasury)
7.26% Govt Stock 2032 (Bond - Govt/Treasury)
89 out of 427 debt funds funds
Net Current Assets (Cash)
Net Current Assets (Cash)
88 out of 427 debt funds funds
  • 7.38% Govt Stock 2027 (Bond - Govt/Treasury) is held by 141 out of 427 mutual funds in the debt s funds category, with a total investment value of ₹31744.16Cr
  • 7.26% Govt Stock 2032 (Bond - Govt/Treasury) is held by 89 out of 427 mutual funds in the debt s funds category, with a total investment value of ₹12544.34Cr
  • Net Current Assets (Cash) is held by 88 out of 427 mutual funds in the debt s funds category, with a total investment value of ₹164894.90Cr


What are Debt Funds?

Debt funds, also known as Debt mutual funds, bond funds or fixed-income funds, are funds who invest in debt securities like government securities, corporate bonds, treasury bills etc. Debt mutual funds provide steady and continuous income to investors. The returns from debt mutual funds are not affected much by the market’s fluctuations as the money is invested in more secure instruments. Debt mutual funds are ideal for those who are looking for a safe investment instrument.


There are certain features that make debt funds a unique kind of investment. The debt funds will have the following features:
Stability image


The debt funds bring stability to the portfolio and are not affected much by market ups and downs like equity instruments, as debt funds invest in secure instruments with fixed rate and maturity.
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High liquidity

Investment in debt funds can be a good way to invest surplus cash to build an emergency reserve and in need of urgent liquidity, you can always redeem the investment.
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Better Returns

The debt mutual funds investment aims to provide safe and steady returns. The returns we get from top debt funds are around 8-10%, much higher than savings and FD interest rates. They invest in fixed-income securities that pay a steady interest amount.
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Low Risk

Debt funds are a safe investment option for conservative investors whose priority is to have a fixed interest income, not capital appreciation. Investors having lower-risk appetite benefit from the credit quality and lower volatility offered by it.

Types of Debt Funds

Here are the various categories of debt funds that one can choose from:
Money market funds image

Money market funds

Money Market Funds invest in debt instruments with maturity upto one year. They aim to generate returns from interest income, while their slightly longer duration offers some scope for capital gains.
Overnight fund image

Overnight fund

Overnight Funds invest in securities having a maturity of 1 day, usually in money market instruments. These funds aim to provide liquidity and convenience, rather than high returns. They are suitable for investors (mainly corporate treasuries) looking to park funds for a very short period. The risk is low in overnight funds due to the short, one-day maturity period.
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Low duration fund

This type of debt fund has a maturity period of 6 to 12 months. The investment is made in debt securities, and these are a good choice for the investors who want to invest for less than a year. They are moderately risky and give better returns.
Dynamic bond fund image

Dynamic bond fund

Investment in dynamic funds is made in different kinds of debt instruments. Based on market behavior, the fund manager decides the investment strategy. The funds move across all classes of debt and money market instruments taking into account fluctuating interest regimes. This fund has moderate risk as the timeframe is between 3 and 5 years.
Credit risk fund image

Credit risk fund

Credit Risk Funds invest a minimum of 65% of total assets in corporate bonds rated AA or below. That is why they usually generate higher yields as compared to the more conservative corporate bond funds. Investors who are willing to take on higher default risk may consider investing in credit risk funds.
Gilt fund image

Gilt fund

Gilt debt funds only invest in securities issued by central and state governments. The maturity period ranges from medium to long-term. Since gilt funds are government-issued debt funds, there is no credit risk, and your capital remains safe. However, government securities are vulnerable to changes in interest rates. Gilt funds are suitable for those who are willing to invest long-term and prefer government-backed investment options.
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Floater fund

As the name suggests, these funds primarily invest instruments that offer a floating interest rate. The primary objective of the fund is to minimize the volatility of investment returns. Floating rate securities are linked to a benchmark rate for debt instruments such as MIBOR. The interest rate is reset periodically based on the interest rate movement. Accordingly, the returns vary.
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Fixed maturity plans

As the term suggests, Fixed Maturity Plans have a fixed locked-in period ranging from months to years. Because of the lock-in period, these are not affected by changing interest rates. So, the NAV of the fund remains the same. These are close-ended and tax-efficient funds and are regarded to be the best alternative to fixed deposits. Those who wish to deposit their money for a fixed period but are anxious about fluctuations in interest rates could opt for FMPs.
Credit opportunities fund image

Credit opportunities fund

These are relatively newer debt funds. Unlike other debt funds, credit opportunities funds do not invest as per the maturities of debt instruments. These funds try to earn higher returns by taking a call on credit risks or by holding lower-rated bonds that come with higher interest rates. These funds are relatively riskier debt funds.

Who should invest?

Debt mutual funds are considered best for investors with the following characteristics:
• Those who are risk averse and would like to invest their money in safe options and earn steady returns.
• Those who want to invest for a short-term like 3 months to a medium-term like 1-3 years.
• Those who seek stability in their portfolio as debt funds are not affected much by the market fluctuations.
• For those who are nearing retirement and do not want to take risks. Such investors can consider transferring their investment from equity mutual funds to debt mutual funds.
• Those who usually invest in saving accounts and fixed deposits but are now looking for better returns.

Things to consider as an investor before investing in Debt mutual funds.

Debt funds are an instrument that brings stability and safety to your investment portfolio. However, there are certain risks involved in debt funds. You should invest in a type of debt fund as per your risk appetite. Here are some points to consider before investing:
Risk: The risk can be of two types:
• Credit risk- As an investor, you should know that debt funds are also market-linked, so there are chances of defaulting. Fund managers sometimes invest in low-credit securities to get good returns, but this may attract the risk of default.
• Interest risk- The market interest rates can affect the type of debt funds you choose for the long term. An unexpected change in interest rates may affect the returns from debt funds. However, the above risks can be avoided by carefully observing the market. Having said that, the risk is less compared to equity mutual funds.
Returns: Returns on debt funds are based on the type of debt funds you have in your portfolio. Debt mutual funds are considered safe and give a steady return on investments. The returns may vary in the long term as shifts in interest rates may impact the returns on these debt funds.
Financial goals: If you have short-term financial goals and would like to invest in comparatively safer instruments and want higher returns than that earned on saving accounts and fixed deposits, you can invest in debt funds.
Investment Cost: This includes expense ratio and exit load. Investment companies charge a fee called expense ratio which includes management fees (fees of fund manager) and operational costs. Regular funds will always have higher expenses (as indicated by their expense ratio) due to added commission costs as compared to their direct counterparts. Debt funds have an expense ratio around 0.5 - 1.5%.

How to Invest in Debt Funds Online?

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Create your profile
Select any best debt fund from our catalogue
Choose between Starting a SIP or One time lumpsum
Complete the payment process


Debt investing is tax-efficient and attracts less tax than other investment instruments. Here are the tax aspects to be aware of:
With the best debt funds, you are liable to pay short-term capital gains if your investment period is less than 3 years. These are to be paid at your income slab rate.
If the investment period is more than 3 years, you will need to pay long-term capital gains tax. LTCGs are taxed at 20% with indexation benefits. However, the tax needs to be paid only at the time of redemption.
There is a tax advantage with debt investing. Let's understand this with the help of an example – Assume that you are debt investing and the fund gave you an 8% return, and the inflation rate is 5% during that period. You will only need to pay tax on the 3% of the debt mutual fund returns. There is no such provision in the case of fixed deposits.

How to evaluate debt funds?

Track record: If the fund has consistently outperformed its peers and the benchmark over a 3 year and 5-year horizon, it is an indication that the fund is well-managed. While past performance is no guarantee of the future returns, it is an important indicator about the track record of the fund, and helps in evaluation with respect to its peers.
Management: Management of the equity funds plays an important role in its performance. Hence, if you have confidence in the asset management company and they are doing an ideal job in necessitating growth, you can bank on this fund. Also, the reputation of the fund manager is an important factor to check.
Expense ratio attached to the funds: This is usually seen as a parameter against all kinds of funds. It is defined as the money undertaken by fund managers for maintenance, marketing, distribution and selling expenses, etc. The right fund will have a desirable expense ratio within the range of 0.5 to 2.5%, which is an ideal industry benchmark.
Asset allocation: One of the key things to look at is how diversified is your fund’s portfolio and where have they majorly invested in. Some funds may invest in more risky debt instruments to generate higher returns while others may invest in safer secturties like Government Bonds. Your risk and returns potential depends on the type of asset allocation you prefer.
Asset Under Management: Higher fund size is complicated to manage, and a smaller fund size lacks flexibility. The Asset under management should not be very high or very low. This allows the funds' manager to liquidate investment and navigate swiftly during turbulent times easily.


Debt investing is a good option for steady and safe returns. From the information above, it is clear that your investment is more secure if you invest in debt funds. Everyone needs security when they age, so it is good to start investing in debt funds at a younger age. However, you should ensure to increase the debt fund percentage as you grow older. Debt funds are also market-linked, so understand the risk and keep an eye on it, especially if your debt funds are for a longer period.
Debt mutual funds in India are good for new investors as there is less risk and steady returns, so if you are looking to start your investment journey in mutual funds, debt mutual funds can be your first choice. The best debt funds give better returns than traditional saving plans like fixed and recurring deposits, so you can consider investing in debt mutual funds for short to medium periods.

Taxability of Debt Mutual Funds

Short Term Capital Gains: If the debt mutual funds are sold in less than three years then it is considered as Short Term and the gains are taxed as per the income tax slab of the investor.

Long Term Capital: Long Term Capital gains are taxed if the mutual funds are sold after three years, then the gains are considered Long Term and are taxed at 20%. Earlier, indexation benefit was available on Debt mutual funds but form April 1, 2023, it is not available any more.


Limitations of Debt Funds

Interest rate risk: Debt funds’ performance is dependent upon the interest rate (declared by central bank). Changes in interest rate impact the returns of debt funds. Usually, an increase in interest rate negatively affects the returns of debt fund and vice-versa.

Credit risk: The fund managers usually invests in the bonds of a company after analysing on the basis of credit rating. Credit rating helps in understanding the credit risk (default risk) of the company with regards to paying the interest and capital invested. Debt funds’ performance gets impacted by credit rating changes. Usually, a credit rating downgrade impacts the debt fund returns negatively.

Inflation risk: Inflation hurts the fund managers’ capabilities to generate the returns. Higher inflation usually means higher interest rates, hurting the companies’ capacity to raise capital at a lower interest rate. Inflation can erode the value of returns.

Liquidity risk: Bond market is less liquid in India (developing). If the company that has borrowed money and facing issue such as credit rating change or defaults or has weak financial position, the liquidity reduces. Fund manager needs to evaluate the liquidity thoroughly and regularly to ensure proper management of bonds portfolio.

Frequently Asked Questions

What are debt funds?

How to invest in debt funds online?

Are debt funds tax free?

Do debt funds pay dividends?

How to choose the best debt funds to invest?

What are the risks involved in investing in debt funds?

How long should I remain invested in debt funds?

Where do debt funds invest my money?

How much money should I invest in debt funds?

What are the expected returns of debt funds?

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