Best Debt Mutual Funds in India
05 June 2025 · Sachin Gadekar
Explore the safest way to grow your wealth with lower-risk, fixed-income mutual funds in India.
What Are Debt Mutual Funds?
In the unpredictable world of equities, debt mutual funds have emerged as a reliable investment option for conservative investors. Whether you're looking to park surplus funds for a short term or want to build a stable income portfolio, debt mutual funds offer a safer alternative to equity-linked instruments.
At GetUltra.club, our mission is to empower investors with easy access to diversified and secure investment opportunities. In this blog, we’ll deep dive into the world of debt mutual funds — what they are, how they work, types, returns, risks involved, and a list of best debt mutual funds in India for 2025.
Debt mutual funds are investment schemes that primarily invest in fixed-income securities like government bonds, corporate debentures, treasury bills, commercial papers, and other money market instruments. The goal is to generate regular income and capital preservation, with minimal risk compared to equity funds.
Unlike traditional fixed deposits, debt funds offer the flexibility of liquidity, slightly better post-tax returns (especially for long-term holdings), and the potential for indexation benefits in taxation.
Types of Debt Mutual Funds in India
The Securities and Exchange Board of India (SEBI) has classified debt mutual funds into 16 categories. Some of the most popular ones include:
1. Liquid Funds
Investment horizon: Up to 91 days
Ideal for: Emergency funds, parking surplus cash
Example: Nippon India Liquid Fund, ICICI Prudential Liquid Fund
2. Short Duration Funds
Investment horizon: 1 to 3 years
Ideal for: Medium-term financial goals
Example: HDFC Short Term Debt Fund, Axis Short Term Fund
3. Corporate Bond Funds
Invest in high-rated corporate bonds (minimum 80%)
Ideal for: Risk-averse investors looking for better yields than FDs
Example: Kotak Corporate Bond Fund, SBI Corporate Bond Fund
4. Gilt Funds
Invest in government securities
Ideal for: Investors seeking sovereign-grade safety
Example: ICICI Prudential Gilt Fund, SBI Magnum Gilt Fund
5. Credit Risk Funds
Invest in lower-rated corporate bonds to generate higher returns
Ideal for: Aggressive debt investors willing to take credit risk
Example: HDFC Credit Risk Fund
Advantages of Debt Mutual Funds
Lower Volatility
Debt funds are less volatile compared to equity mutual funds, making them suitable for conservative investors.
Tax Efficiency
If held for over three years, long-term capital gains are taxed at 20% with indexation benefits—making them more tax-efficient than fixed deposits.
Liquidity
Most debt mutual funds (except tax-saving ones) offer easy redemption without penalties.
Diversification
They help in building a balanced investment portfolio with lower risk exposure.
Risks Involved in Debt Mutual Funds
While safer than equity, debt funds aren’t entirely risk-free:
Interest Rate Risk: Rising interest rates may reduce the value of debt securities.
Credit Risk: There's a chance that the issuer may default on payments.
Liquidity Risk: Some debt funds may struggle to sell securities in times of market stress.
Always choose funds with high-rated instruments and experienced fund management teams to mitigate these risks.
How to Choose the Best Debt Mutual Funds?
Investment Duration: Match the fund's average maturity with your investment horizon.
Credit Quality: Check the credit rating of underlying securities.
Fund Performance: Compare historical returns over different time frames.
Expense Ratio: Lower expenses can significantly boost your net returns.
Fund Manager Track Record: Experience and past consistency matter.
Best Debt Mutual Funds in India for 2025
| Fund Name | Category | 3-Year CAGR | Expense Ratio |
|---|---|---|---|
| ICICI Prudential Corporate Bond Fund | Corporate Bond | 6.9% | 0.50% |
| HDFC Short Term Debt Fund | Short Duration | 6.5% | 0.38% |
| Nippon India Liquid Fund | Liquid Fund | 5.8% | 0.25% |
| SBI Magnum Gilt Fund | Gilt Fund | 7.1% | 0.45% |
| Axis Treasury Advantage Fund | Low Duration | 6.2% | 0.35% |
FAQs on Debt Mutual Funds
1. Are debt mutual funds better than fixed deposits?
Debt mutual funds may offer better post-tax returns and liquidity compared to FDs, especially for long-term investors.
2. Are debt mutual funds safe?
They carry lower risk than equity funds but are not risk-free. Choosing funds with high-quality holdings reduces risk.
3. What is the minimum investment in debt mutual funds?
You can start investing in most debt funds with as little as ₹500 to ₹1,000.
4. Can debt funds be withdrawn anytime?
Yes, except for tax-saving variants, most debt funds offer easy redemption with minimal or no exit loads.
5. Which is the best category of debt mutual funds?
It depends on your goal and timeline. For short-term goals, liquid funds work best; for medium to long-term goals, corporate bond or gilt funds are ideal.