Home
Best Debt Mutual Funds to Invest in 2025
16 Sept 2025
5 mins read
Debt mutual funds invest in fixed-income assets like bonds and treasury bills, offering steady returns with lower risk. They are ideal for investors seeking consistent income without high market volatility. Choosing the right fund depends on your financial goals, risk tolerance, and market outlook. Let’s explore top debt funds in India for 2025 that balance risk and reliability.
What are Debt Mutual Funds?
A debt mutual fund invests in various types of debt securities issued. It may include corporate bonds and debentures, money market products like commercial papers, and government-issued securities. Companies issue bonds to raise capital for business expansion. Whereas, governments may issue bonds to obtain funds for social welfare or infrastructure projects. A debt mutual fund invests in all these types of bonds. The interest obtained from these bonds is distributed to the investors.
Table of Contents
Top Debt Mutual Funds to Consider in 2025
Here’s a list of the best debt funds in India.
Name | AUM | 3Y CAGR | 5Y CAGR |
₹10,166 Cr | 5.43% | 4.77% | |
₹7,706 Cr | 6.97% | 7.12% | |
₹281 Cr | 5.6% | 7.62% | |
₹2,994 Cr | 5.41% | 7.26% | |
₹5,965 Cr | 5.43% | 7.22% | |
₹1,703 Crs | 5.49% | 7.32% | |
₹337 Crs | 5.15% | 6.86% | |
₹7,497 Crs | 6.39% | 7.53% | |
₹1,932 Crs | 6.81% | 7.99% | |
₹1,621 Crs | 5.63% | 6.79% |
Disclaimer: The above information contains data updated as of 26th June 2024. However, it is important to conduct thorough research before making any investment decisions in these stocks.
Best Debt Funds In India Overview
Let’s take a closer look at the best debt funds in India.
ICICI Prudential Overnight Fund
ICICI Prudential Overnight Fund is the top-performing debt fund, with a reasonable 5-year CAGR. It offers high liquidity by investing mainly in overnight securities. With a 0.1% expense ratio, it appeals to investors looking for short-term investment opportunities. The fund's large AUM of Rs. ₹10,166 crores indicates its popularity and trustworthiness among investors.
Nippon India Nivesh Lakshya Fund
Nippon India Nivesh Lakshya Fund invests in government securities, to achieve optimal returns without high risk. It may be suitable for investors looking for long-term investment opportunities as its portfolio includes 96.78% government bonds. The fund’s 5-year CAGR is also quite reasonable, making it a top debt fund for moderate-risk investors.
Edelweiss Banking & PSU Debt Fund
Edelweiss Banking and PSU Debt Fund is a debt mutual fund that focuses on high-quality debt instruments from banks, public sector undertakings (PSUs), and public financial institutions. With an AUM of Rs. 281 crores and a focus on AAA-rated and government securities, the fund looks to give steady returns. It can be one of the best debt funds for conservative investors looking for regular income in the medium to long term.
ICICI Pru Constant Maturity Gilt Fund
The ICICI Prudential Constant Maturity Gilt Fund invests in government securities with a 10-year duration. With an AUM of Rs. ₹2,994 crores and an expense ratio of 0.23%, it is suitable for investors looking for long-term returns higher than inflation. The fund invests mostly in government bonds, which ensures good credit quality and safety. Its performance is quite good, with the highest returns among long-term funds.
HSBC Corporate Bond Fund
The HSBC Corporate Bond Fund is a UK-based fund that aims to outperform the Markit iBoxx GBP Corporates Index in addition to 1% annually over three years. It generally invests in investment-grade bonds issued or hedged in pound sterling, including those issued by corporations, supranational organisations, and government-backed entities.
Axis Dynamic Bond Fund
Axis Dynamic Bond Fund is a flexible debt fund that changes its portfolio across various debt and money market instruments to mitigate interest rate volatility. Launched in 2013, it has an AUM of Rs. 1,₹1,703 crores. The fund invests 96.83% in debt. 30.92% is invested in government securities and 65.91% in low-risk assets. It is one of the top debt mutual funds for those seeking moderate-risk investing opportunities with the freedom to select bonds.
Bandhan G-Sec - Constant Maturity Plan
Bandhan Government Securities Fund-Constant Maturity Plan is an open-ended debt fund that invests in government securities with a 10-year fixed maturity. It has very high interest rates and minimal credit risk. The fund invests mostly in government bonds, state development loans, treasury bills, and cash management bills. With an average maturity of around ten years, it can be appropriate for investors with a minimum investment horizon of three years.
Aditya Birla SL Short-term Fund
Aditya Birla Sun Life Short Term Fund is one of the top short-term debt funds offering income and capital appreciation by investing in a diverse range of debt and money market assets. With a Macaulay duration of 1-3 years, the portfolio’s interest rate risk and credit risk are a bit high. It is one of the top shorter-duration debt funds for investors seeking income and capital growth in 1 to 3 years. It has enough liquidity and a diverse portfolio with an investment of Rs. 1,000.
Axis Strategic Bond Fund
Axis Strategic Bond Fund is an open-ended medium-term debt fund. Its aim is to maximise returns by investing in all kinds of debt and money market instruments. The fund has an AUM of Rs. 1,932 crores and an expense ratio of 0.35%. Moreover, the fund has a very considerable rate of compounded annual growth over 5 years.
SBI Magnum Constant Maturity Fund
SBI Magnum Constant Maturity Fund is an open-ended debt plan that invests in government securities having a fixed maturity of around ten years. It seeks to generate profits by investing primarily in Central and State Government securities, which have a relatively high interest rate risk and a low credit risk. The fund is managed using an active interest rate risk approach, appropriate for investors with long investment horizons.
How do Debt Mutual Funds Work?
- They pool money from investors to invest in fixed-income securities like bonds, treasury bills, and government securities.
- These funds earn interest income from the debt instruments, which is passed on to investors as regular returns.
- The fund’s value fluctuates based on interest rate changes and credit risk of the securities held.
- Debt mutual funds aim to provide steady income with relatively lower risk compared to equity funds.
Types of Debt Mutual Funds
Liquid Funds: Invest in short-term money market instruments, ideal for very short-term parking of funds.
Short-Term and Ultra Short-Term Funds: Invest in debt securities with slightly longer maturities, offering moderate returns with low risk.
Corporate Bond Funds: Primarily invest in high-quality corporate bonds, aiming for higher yields than government securities.
Gilt Funds: Invest only in government securities, offering safety but sensitive to interest rate changes.
Why Invest in Debt Mutual Funds?
Consistent Returns: Debt mutual funds provide steady income through interest payments on bonds and other fixed-income instruments, offering investors reliable debt fund returns.
Diversification: These funds invest in a mix of fixed-income assets, reducing the risk compared to single investment options like bonds. This diversification is especially beneficial when investing in top debt funds.
Liquidity: Unlike Fixed Deposits (FDs), debt funds offer better liquidity, allowing you to exit the investment when needed, making them more flexible than traditional fixed income funds.
Lower Risk than Equities: Debt funds are less volatile than stocks, making them ideal for risk-averse investors looking for low-risk mutual funds.
Tax Efficiency: Long-term capital gains (LTCG) on debt funds are taxed at a lower rate than interest income from FDs, making them a tax-efficient investment option.
Debt Mutual Funds vs Fixed Deposits: Which Is Better?
Return Potential: Debt funds generally offer higher returns than FDs, especially when interest rates are low, providing better debt fund returns.
Taxation: Interest from FDs is taxed at your income tax slab rate, while debt mutual funds are taxed at 20% with indexation for long-term gains, making them more tax-efficient than FDs.
Liquidity: Debt funds allow easier access to your money, while FDs lock your investment for a fixed tenure, making investment in debt funds a more flexible option.
Risk: Debt funds have slightly higher risk due to market fluctuations, while FDs are risk-free but offer lower returns.
Inflation Protection: Debt mutual funds can beat inflation over time, unlike FDs, which may not keep pace with rising prices.
Taxation on Debt Mutual Funds
Short-Term Capital Gains (STCG): Gains from debt funds sold within 3 years are taxed at 30% (plus surcharge and cess), making it important to consider the holding period when investing in debt mutual funds.
Long-Term Capital Gains (LTCG): Gains from debt funds held for more than 3 years are taxed at 20% with indexation benefits, which is a tax advantage for long-term investors in best debt mutual funds.
Interest Income: Interest income earned from debt mutual funds is added to your taxable income and taxed according to your income tax slab, so always factor in tax implications for fixed income funds.
Tax Efficiency: Debt funds are often more tax-efficient than fixed deposits, especially for long-term investors, providing an edge in terms of after-tax returns.
Dividend Distribution Tax: If you choose the dividend option, it may attract a Dividend Distribution Tax (DDT), which varies based on the fund’s category, affecting debt mutual fund types.
Common Myths About Debt Mutual Funds
Myth 1: Debt Funds Are Risk-Free: Debt funds still carry market risk, especially during interest rate fluctuations and economic changes. Understanding the debt mutual fund types is important to manage this risk.
Myth 2: Only Fixed Deposits Are Safe: While FDs are safe, debt mutual funds can provide better returns, especially with proper fund selection, making them a strong alternative for low-risk mutual funds.
Myth 3: Debt Funds Give Fixed Returns: Unlike FDs, debt funds do not guarantee fixed returns, as returns depend on market conditions and the performance of underlying assets in the top debt funds.
Myth 4: Debt Funds Are Only for Conservative Investors: Even aggressive investors can benefit from debt funds for diversification and stable income, making them part of a balanced portfolio.
Myth 5: Debt Funds Have Low Returns: While debt mutual funds are conservative, they can deliver attractive returns compared to traditional options like FDs, especially when investing in best debt mutual funds 2025.
Tips for Investing in Debt Mutual Funds
Assess Your Risk Appetite: Choose debt mutual funds based on your risk tolerance and financial goals, from low-risk short-term debt funds to higher-risk long-term funds, ensuring you select the right debt mutual fund types.
Stay for the Long Term: For optimal returns, hold your debt funds for at least 3 years to benefit from tax advantages and better returns, especially when investing in fixed income funds.
Focus on Fund Quality: Research fund managers, the credit quality of underlying assets, and past performance before investing, particularly in top debt funds.
Diversify Your Portfolio: Include both debt and equity mutual funds to balance risk and returns in your overall portfolio, and enhance returns by selecting the best debt mutual funds for diversification.
Monitor Regularly: Stay updated with interest rate changes and economic conditions, which can impact debt fund returns and strategy, ensuring your investment in debt funds remains aligned with market trends.
How to Choose the Best Debt Mutual Funds for You?
Assess the following factors to determine whether a debt fund is appropriate for you or not:
- Investment Horizon: Consider the time period for which you want to stay involved in a debt fund. It can be just a day or 10-20 years. Overnight funds have the shortest average maturity of one day. Long-duration and gilt funds are examples of debt funds that hold assets with extended average maturities.
- Risk Appetite: While all debt schemes involve interest rate, credit, and inflation risk, the degree of risk differs for each fund. Liquid and overnight funds have the lowest interest rate risk, whereas a gilt fund has the lowest credit risk. Properly check the risks involved with debt funds before investing in them.
- Interest Rate Trend: When interest rates increase, it is better to invest in short-term funds than long-term funds. This is because when interest rates rise, the adjusted duration of long-term debt funds will increase. Similarly, longer-term debt funds are advantageous when interest rates are low.
Who Should Invest in Debt Mutual Funds?
The following types of investors can invest in debt mutual funds.
- Low-risk investors: Individuals focused on capital preservation over large profits and want a consistent income.
- Investors seeking regular income: Investors who require a consistent income to cover their costs, such as retired individuals.
- Risk-averse investors: Individuals looking to escape the volatility of equities markets and search for safer investing opportunities.
- Investors with short to medium-term goals: Investors with short or medium-term financial objectives, such as saving for a car or wedding.
- Investors looking for Diversification: Investors who want to properly manage risk, investors look to balance their investment portfolio with a mix of stock and debt.
Advantages of Investing in Debt Mutual Funds
Here are the key advantages of debt mutual funds.
- Regular income: Debt funds distribute the interests on the underlying securities. It is ideal for investors looking for a consistent income source.
- Low risk: Debt mutual funds are often less risky than stocks. Fixed-income instruments, which generally have a defined interest rate and maturity date, help to decrease the risk involved in debt funds.
- Portfolio diversification: Debt funds can diversify your portfolio as they invest in several debt instruments. This can cover or reduce losses due to the poor performance of some assets in your portfolio.
- Professional Management: Generally, expert fund managers look after the debt funds. They utilise their knowledge and experience to make the right investments to ensure profits and risk management.
- High Liquidity: Debt mutual funds are easily converted to cash. During a financial emergency, investors can redeem their units more quickly than other investment choices, such as fixed deposits.
- Lower Costs: According to SEBI regulations, the expense ratio of debt funds cannot exceed 2%. Overnight and liquid funds have very low expense ratios.
- Indexation: Debt funds provide indexation benefits for long-term investments. So, the cost of investment is adjusted depending on inflation rates while calculating capital gains tax.
- Partial Withdrawals: Investors can make partial withdrawals from debt funds to fulfil any essential financial obligations.
Risks Involved While Investing in Debt Funds
The following are some risks associated with debt funds.
- Interest rate risk: It depends on market interest rates. Even though the best debt funds are quite safe, they are still exposed to the market.
- Credit risk: It is the risk of a debt fund's bonds defaulting on interest and principal payments. Even liquid funds are not fully safe from the effects of credit default.
- Exit Load: Though these funds perform well in the short to medium term, they may incur an exit load when you leave, which you should be aware of before selling the fund.
Conclusion
There are several debt mutual funds to pick from that can fulfil the investment objectives of investors. However, select the best debt funds to invest in based on your investment horizon. Remember that debt funds are not completely risk-free because they are market-linked instruments. Analyse all the factors before investing in any fund.
