Top Debt Mutual Funds in India 2025: Types of Debt Funds for SIP & More
Debt mutual funds in India have become a popular investment choice for those seeking stable returns with relatively lower risk than equity investments. These funds primarily invest in fixed-income securities like government bonds, corporate bonds, treasury bills, and other money market instruments, thus making it a low-risk investment scheme compared to equity investment. To identify the best debt mutual funds that align with your investment goals, you should evaluate the fund’s performance, risk profile, investment strategy, and risk tolerance.
In this blog, we will delve deeper into identifying the best Indian debt funds in the last 5 years and explore the benefits of investing in debt mutual funds.
Best Debt Funds in India 2025
Here is a list of top debt mutual funds that you can consider investing in India 2025.
| Fund Name | Sub Category | AUM (Rs. in cr.) | Expense Ratio (%) | CAGR 5Y (%) |
|---|---|---|---|---|
| Aditya Birla SL Medium Term Plan | Medium Duration Fund | 2,048.53 | 0.86 | 12.42 |
| Bank of India Credit Risk Fund | Credit Risk Fund | 113.81 | 0.98 | 9.86 |
| Aditya Birla SL Credit Risk Fund | Credit Risk Fund | 923.70 | 0.67 | 9.83 |
| DSP Credit Risk Fund | Credit Risk Fund | 189.70 | 0.4 | 9.70 |
| JM Low Duration Fund | Low Duration Fund | 228.84 | 0.35 | 9.61 |
| UTI Dynamic Bond Fund | Dynamic Bond Fund | 626.15 | 0.69 | 9.45 |
| UTI Medium to Long Duration Fund | Medium to Long Duration Fund | 311.56 | 1.17 | 8.87 |
| Baroda BNP Paribas Credit Risk Fund | Credit Risk Fund | 175.93 | 0.79 | 8.80 |
| Bank of India Short Term Income Fund | Short Duration Fund | 99.44 | 0.45 | 8.26 |
| UTI Short Duration Fund | Short Duration Fund | 2,446.08 | 0.44 | 7.82 |
Disclaimer: Please note that the above table is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing. The data is derived from Tickertape Stock Screener and is subject to real-time updates.
Note: The list of debt mutual funds is derived from Tickertape Mutual Fund Screener and is as of 3rd January 2025. The parameters used to curate the list are as follows:
- Category: Debt
- Plan: Growth
- 5Y CAGR: Sort from highest to lowest.
🚀 Pro Tip: You can use Tickertape’s Stock Screener to research and evaluate stocks with over 200+ filters and parameters. Tickertape’s Stock Screener to research and evaluate stocks with over 200+ filters and parameters.
About Top 10 Performing Debt Funds in India
Aditya Birla SL Medium Term Plan
A debt mutual fund focusing on medium-term fixed-income securities, Aditya Birla SL Medium Term Plan aims for stable returns with moderate risk. It invests in corporate bonds, government securities, and money market instruments, suitable for investors seeking consistent income over a 3-4 year horizon.
Bank of India Credit Risk Fund
Bank of India Credit Risk Fund is a credit risk fund investing in lower-rated corporate bonds with higher yield potential. It targets investors with a moderate-to-high risk appetite, aiming to generate superior returns by capitalising on credit spreads and active bond selection.
Aditya Birla SL Credit Risk Fund
A debt mutual fund specialising in credit-risk instruments, Aditya Birla SL Credit Risk Fund primarily invests in sub-AA-rated corporate bonds. It seeks to deliver higher returns by taking calculated credit exposure while maintaining a diversified portfolio for risk mitigation.
DSP Credit Risk Fund
DSP Credit Risk Fund is a debt fund investing in high-yield, lower-rated corporate bonds, aiming to provide attractive returns through active credit selection. It is suitable for investors comfortable with moderate-to-high risk in exchange for potentially better long-term fixed-income gains. However, investors should do their own research and consult a financial advisor before choosing any fund.
JM Low Duration Fund
A short-term debt fund investing in money market and fixed-income instruments with a low duration strategy, JM Low Duration Fund aims to provide liquidity and stability with relatively lower risk, making it suitable for conservative investors seeking short-term income. However, investors should do their own research and consult a financial advisor before choosing any fund.
UTI Dynamic Bond Fund
UTI Dynamic Bond Fund is a dynamic bond fund with the flexibility to invest across maturities and interest rate cycles. It actively manages duration and credit risk to optimise returns, making it suitable for investors looking for strategic debt exposure. However, investors should do their own research and consult a financial advisor before choosing any fund.
UTI Medium to Long Duration Fund
A debt fund investing in medium-to-long-term fixed-income instruments, UTI Medium to Long Duration Fund primarily focuses on government securities and corporate bonds. It is designed for investors seeking stable returns with a longer investment horizon and moderate interest rate risk. However, investors should do their research and consult a financial advisor before choosing any fund.
Baroda BNP Paribas Credit Risk Fund
Baroda BNP Paribas Credit Risk Fund is a credit risk fund investing in low-rated, high-yield corporate bonds to generate higher returns. It can suit investors with an appetite for moderate-to-high credit risk in pursuit of enhanced fixed-income gains. However, investors should do their own research and consult a financial advisor before choosing any fund.
Bank of India Short Term Income Fund
A short-duration debt fund focusing on fixed-income securities with relatively lower interest rate risk, Bank of India Short Term Income Fund offers stability and liquidity, making it an ideal choice for conservative investors with a short investment horizon. However, investors should do their own research and consult a financial advisor before choosing any fund.
UTI Short Duration Fund
UTI Short Duration Fund is a debt mutual fund investing in short-duration bonds, offering a balance of stability and returns. It aims to generate consistent income with low-to-moderate risk, making it suitable for investors seeking a relatively safe fixed-income option. However, investors should do their own research and consult a financial advisor before choosing any fund.
How to Invest in Debt Funds?
You can easily invest in debt mutual funds by following these steps:
- To invest in mutual funds, you can visit an equity investment platform such as smallcase or Tickertape.
- The next step would be to research and identify the best debt funds which aligns with your investment thesis. You can easily select and learn more about the best debt funds with the help of a financial tool like the Tickertape Mutual Fund Screener. With 50+ pre-loaded filters, it helps you to create a comprehensive list by giving insights about the fund’s performance. Try it now!
- Once you have selected the funds based on different metrics and parameters, go to smallcase.com or the smallcase app, and login via your phone number. Click on ‘Discover‘ and enter the name of the specific mutual fund name in the search bar and hit enter. You can click on ‘invest now’ and select whether you want to invest a lump sum amount or start a debt fund SIP plan and start investing!
What are Debt Mutual Funds?
Debt mutual funds are investment schemes that primarily invest in fixed-income securities like bonds, treasury bills, and other money market instruments, aiming to provide investors with returns through interest income and capital appreciation.
Different Types of Debt Funds
Debt funds are mutual funds that primarily invest in fixed-income securities such as bonds, treasury bills, and corporate debt. They cater to investors seeking relatively stable returns with lower risk compared to equity funds. Here are the different types of debt funds:
1. Liquid Funds
These funds invest in short-term money market instruments with maturities of up to 91 days, offering high liquidity and low risk. They are suitable for investors looking to park surplus funds for a short period.
2. Ultra Short Duration Funds
Ultra-short duration funds invest in instruments with maturities between 3 and 6 months, offering slightly higher returns than liquid funds. They balance liquidity and returns effectively.
3. Low Duration Mutual Funds
Low duration funds invest in securities with maturities between 6 months and a year. They are ideal for investors seeking returns higher than savings accounts but with moderate risk.
4. Short Duration Funds
These funds invest in debt instruments with durations of 1 to 3 years. They are suitable for conservative investors aiming for stable returns over a medium-term horizon.
5. Medium Duration Funds
Medium duration funds invest in securities with a portfolio duration of 3 to 4 years. They aim to generate higher returns by taking moderate interest rate risks.
6. Credit Risk Funds
Credit risk funds focus on lower-rated corporate bonds (AA or below) with the potential for higher returns. They aim to capitalise on the credit upgrade potential of these bonds but involve higher risk.
7. Dynamic Bond Funds
These funds actively adjust the portfolio duration based on changing interest rate scenarios. They invest across maturities and are ideal for investors seeking active interest rate management.
8. Corporate Bond Funds
Corporate bond funds invest predominantly in high-rated corporate debt instruments. They aim to generate consistent income with relatively low credit risk.
9. Gilt Funds
Gilt funds invest exclusively in government securities, offering high safety since these are backed by the government. They are ideal for risk-averse investors.
10. Money Market Funds
Money market funds invest in short-term debt instruments such as treasury bills, commercial papers, and certificates of deposit. These funds provide high liquidity and moderate returns.
11. Banking and PSU Funds
These funds invest in debt securities issued by banks, public sector undertakings (PSUs), and other public financial institutions. They are relatively safe and offer steady returns.
12. Fixed Maturity Plans (FMPs)
FMPs are close-ended debt funds that invest in securities matching the fund’s maturity period. They offer predictability in returns if held until maturity.
13. Floater Funds
Floater funds primarily invest in floating-rate instruments whose interest payouts are linked to market rates, making them less sensitive to interest rate changes.
14. Overnight Funds
Overnight funds invest in securities with a maturity of one day. They are the least risky debt funds, ideal for parking funds for an extremely short duration.
15. Long Duration Mutual Funds
These funds are invested in instruments with a portfolio duration greater than 7 years. They are suited for investors with a long-term horizon and a higher appetite for interest rate risks.
How to Select the Best Debt Fund for Investment?
When selecting the best debt mutual funds, investors should consider the following factors:
- Investment Objective: While identifying the best debt fund for investment, ensure the fund’s investment strategy aligns with your financial goals and investment horizon.
- Risk Profile: You can assess the fund’s risk profile in terms of credit risk, interest rate risk, and liquidity risk in order to identify the best mutual funds that are debt oriented,
- Past Performance: While past performance is not indicative of future results, it can provide insights into the fund manager’s expertise and the fund’s consistency. You can also use the historical performance of funds to compare debt mutual funds and choose which one suits you best.
- Expense Ratio: Lower expense ratios can lead to higher net returns for investors. However, no such returns are guaranteed and market fluctuations can impact any fund returns.
Features of Debt Mutual Funds
Now that we have understood the debt mutual funds meaning, let’s learn more about its characteristics. Some of them have been mentioned below:
- Diversification: Debt funds invest across various debt instruments, mitigating risk by spreading investments.
- Lower Volatility: Compared to equity funds, debt funds are less volatile, offering more stability to the investment portfolio.
- Liquidity: These funds provide high liquidity, allowing investors to buy or sell units easily without significant impact on the market price.
- Regular Income: They aim to deliver regular income through interest earnings, making them suitable for investors seeking steady returns.
- Tax Efficiency: Debt funds offer tax-efficient returns over the long term, especially through indexation benefits for investments held for more than three years.
Who Should Invest in Debt Mutual Funds?
Investing in debt mutual funds is suitable for investors whose investment thesis aligns with the below-mentioned persona –
- Conservative Investors: Those who prioritise capital preservation over high returns and prefer stable income from their investments.
- Income Seekers: Investors who need regular income to meet their expenses, such as retirees.
- Risk-Averse Investors: Individuals who prefer avoiding the volatility of equity markets and are looking for safer investment avenues.
- Short to Medium-Term Goal Planners: Investors with financial goals that are 1 to 5 ys away, such as saving for a car, a wedding, or a down payment on a house.
- Portfolio Diversifiers: Investors looking to balance their investment portfolio with a mix of equity and debt to manage risk effectively.
Potential Risks Associated with Debt Mutual Funds
While debt mutual funds are considered safer than equity funds, they are not entirely risk-free. The main risks associated with debt funds include:
- Interest Rate Risk: The risk of bond prices falling due to rising interest rates can affect even the best performing debt funds.
- Credit Risk: The risk of default by the issuer of the bond can lead to potential losses in even the safest debt funds.
- Liquidity Risk: The risk associated with selling a security without significantly impacting its price.
The returns from debt funds are generally more predictable and less volatile than equity funds. However, interest rate movements, the credit quality of the portfolio, and the fund’s investment strategy can influence it.
Advantages of Investing in Debt Mutual Funds
There are certain advantages of investing in the best debt mutual funds –
- Regular Income: Debt mutual funds often distribute income generated from the interest of the underlying securities. It can be suitable for investors seeking a steady income stream.
- Lower Risk: Compared to equity investments, debt mutual funds generally offer lower risk. The risk is reduced due to investments in fixed-income securities, which typically have a predetermined interest rate and maturity date.
- Diversification Benefits: By investing in a variety of debt instruments, these funds help in spreading out risk. Diversification can protect against the poor performance of a single security or sector.
- Professional Management: Experienced fund managers manage debt mutual funds and make informed decisions on which securities to buy or sell. This expertise can potentially lead to better returns and risk management for the investor.
- Liquidity: These funds generally offer high liquidity, allowing investors to buy or sell their fund units on any business day. This feature is particularly beneficial for those needing to access their funds on short notice.
- Tax Efficiency: Unlike traditional fixed-income investments like bank fixed deposits, debt mutual funds can be more tax-efficient, especially for long-term investments. Previously, the government taxed long-term capital gains from debt mutual funds at a lower rate with indexation benefits, helping to reduce the tax burden. However, it’s important to note that tax laws are subject to change and can impact the tax efficiency of these investments.
- Indexation Benefit: For long-term investments, debt mutual funds offer the benefit of indexation, which adjusts the purchase price of investments for inflation before calculating capital gains tax. This could significantly reduce the tax liability. However, recent changes in tax laws have affected the availability of indexation benefits, so it’s crucial to stay updated on current tax regulations.
How Returns are Calculated on the Top Debt Mutual Funds?
Calculating returns on debt mutual funds involves several steps and factors, including the interest income from the securities in the fund’s portfolio, capital appreciation, and any dividends distributed. Here’s a step-by-step explanation of how returns are calculated on debt mutual funds –
Interest Income
You can calculate the interest income by summing up the interest received from each debt security in the portfolio. If a fund has multiple securities, you would calculate the weighted average of the interest income based on the proportion of each security in the portfolio.
Capital Appreciation
The price of bonds in the portfolio can increase or decrease based on interest rate movements. If interest rates fall, the price of existing bonds with higher interest rates generally rises, and vice versa. The capital appreciation or loss can be calculated as:
Capital Gain or Loss = (Selling Price – Purchase Price) * No. of Units
Dividend Distribution
If the fund opts to distribute income as dividends, this should be added to the total return. The dividend per unit can be calculated as:
Dividend Per Unit = Total Dividend Distributed / No.of Units Outstanding
Net Asset Value (NAV) Performance
The NAV reflects the value of each unit of the fund and is calculated as:
NAV = Total Assets – Total Liabilities / No. of Units Outstanding
The return based on NAV can be calculated using the formula for absolute return if the holding period is less than a year:
Absolute Return = ((Current NAV – Initial NAV) / Initial NAV) × 100
For periods longer than a year, the Compound Annual Growth Rate (CAGR) is used:
CAGR = (((Ending Value / Beginning Value)^(1 / Number of Years)) – 1) × 100
Yield to Maturity (YTM)
For an estimate of future returns, you can use the YTM, which is the total return anticipated on a bond if the bond is held until it matures. The formula for calculating expected 1-year returns using YTM is:
Expected 1 Year Returns = YTM + (Interest Rate Change × Modified Duration) – Expense Ratio
Indexation Benefit
For long-term investments, indexation benefits can be used to adjust the purchase price for inflation, which can reduce the capital gains tax liability. The formula for indexation is:
Indexed Purchase Price = Original Purchase Price × CII of the Sale Year / CII of the Purchase Year
where CII stands for Cost Inflation Index.
Note: By combining these calculations, you can arrive at the total returns from a debt mutual fund schemes. It’s important to note that these calculations provide an estimate and actual returns can vary based on market conditions and the fund’s performance.
Taxation on Debt Mutual Funds as per the 2024-25 Budget
Understanding the latest tax regulations on debt mutual funds is crucial for effectively managing your investments. The Union Budget 2024 has introduced significant changes to the taxation of debt mutual funds. Here is a detailed breakdown of the new tax rules:
Short-Term Capital Gains (STCG)
If you sell your debt fund units within three years (36 months), the gains from these investments are considered short-term capital gains. According to the new budget, these gains will be taxed according to your income tax slab rate.
Long-Term Capital Gains (LTCG)
For debt funds held for over three years (36 months), the gains are categorized as long-term capital gains. The key points to note under the new budget are:
- Tax Rate: The tax rate for long-term capital gains on debt funds is now a flat 12.5%, regardless of the amount of gain.
- No Indexation Benefit: The benefit of indexation, which previously allowed investors to adjust the purchase price of their assets for inflation, has been removed for debt funds. This means that the entire gain from selling a debt fund after three years will be taxable at the flat rate of 12.5%.
Summary
| Capital Gains Tax | Description |
| Short-Term Capital Gains (STCG) | If you sell your debt fund units within three years (36 months), the tax will be as per your income tax slab. |
| Long-Term Capital Gains (LTCG) | For debt funds held for over three years (36 months), the tax rate is now a flat 12.5% without indexation benefits. |
5 Things to Consider Before Investing in Debt Mutual Funds
When considering investing in debt funds in India, here are five key factors to keep in mind when choosing mutual funds that are debt oriented:
- Credit Quality: You can assess the average credit quality of the debt fund’s portfolio to ensure it aligns with your risk tolerance. Higher credit ratings typically indicate lower risk but also lower returns, while lower-rated instruments may offer higher yields but come with an increased risk of default.
- Portfolio Diversification: It can be helpful to ensure that the fund’s portfolio is well-diversified to mitigate risks. Investors can avoid funds with excessive exposure to a single issuer or group of companies, as this can lead to concentration risk and potentially significant losses in case of default.
- Interest Rate Risk: You can consider the fund’s modified duration, which indicates its sensitivity to interest rate changes. Funds with longer durations are more vulnerable to interest rate fluctuations, which can impact the fund’s net asset value (NAV).
- Expense Ratio: Since debt funds generally offer modest returns, the expense ratio becomes a crucial factor. A lower expense ratio means higher net returns for the investor, making it an important consideration when choosing a debt fund.
- Investment Horizon and Maturity Profile: Match the fund’s duration profile with your investment horizon. Short-term funds are suitable for investment horizons of up to one year, while medium to long-term funds are better for longer investment periods. This alignment can help manage interest rate risk and ensure liquidity as per your needs.
To Wrap It Up…
Debt mutual funds offer a diversified investment option for those looking to earn stable returns with lower risk. By understanding the different types of debt funds, their investment strategies, and associated risks, investors can make informed decisions that align with their financial goals and risk tolerance.
As always, investors must conduct their own research and/or consult their financial advisor before investing.
Most Popular Mutual Funds:
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Frequently Asked Questions (FAQs) on the Best Debt Mutual Funds
Based on 5-yr CAGR, here is a list of debt mutual funds in India:
1. Aditya Birla SL Medium Term Plan
2. Bank of India Credit Risk Fund
3. Aditya Birla SL Credit Risk Fund
4. DSP Credit Risk Fund
5. JM Low Duration Fund
Note: This information is provided for educational purposes and is not intended as a recommendation or endorsement.
Debt funds invest in fixed-income assets like corporate and government bonds, as well as other debt instruments. They generate returns from the interest and price appreciation of the underlying debt holdings.
Choosing between Fixed Deposits (FDs) and Debt Mutual Funds in India depends on personal financial objectives, risk appetite, and investment timeline. FDs can offer guaranteed returns and capital safety, ideal for risk-averse investors valuing security. In contrast, Debt Mutual Funds can offer higher returns through diversified investments in debt securities like government and corporate bonds.
Debt funds can be suitable for short-term investment horizons of one to three years. However, some investors may choose to explore equity funds to achieve their long-term financial goals. You should carefully assess your investment objectives and risk tolerance before making a decision.
Short-term capital gains in debt mutual funds are taxed based on the investor’s applicable tax rate, while long-term capital gains from debt funds incur a 20% tax rate with indexation.
