Debt Mutual Funds
Low-Risk, High-Reward Investing

Debt funds invest in fixed-income instruments like bonds, government securities, treasury bills, commercial papers, and non-convertible debentures etc. Their main source of income is interest payments received on debt instruments. They are ideal for short-term investors looking for stable, fixed, and regular income.

  • Low Risk
    Apt for conservative investors
  • Steady Income
    Fixed interest inflow
  • Interest Sensitivity
    High fluctuations

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Debt Funds

Features of Debt Mutual Funds

  • Debt funds range from extremely low risk (money market funds) to high-risk (long duration and credit risk funds).
  • Debt funds are more tax efficient than traditional investment options like fixed deposits and corporate FDs if held for more than 3 years.
  • Fixed interest income makes debt funds ideal for risk-averse, conservative investors.
  • Debt funds provide access to Indian capital markets which is otherwise not accessible to retail investors.

Top 10 Performing Debt Mutual Funds

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ICICI Pru Retirement Fund - Pure Equity - Dir (G)
Retirement Fund
NAV
32.12
Min. SIP Amt
₹ 100
Value Research
Stars
1 Y Return
53.80
3 Y Return
129.69
5 Y Return
213.01
ICICI Pru Retirement Fund - Pure Equity (G)
Retirement Fund
NAV
29.54
Min. SIP Amt
₹ 100
Value Research
Stars
1 Y Return
51.63
3 Y Return
120.44
5 Y Return
190.05
HDFC Retirement Savings Fund - Equity - Dir (G)
Retirement Fund
NAV
55.36
Min. SIP Amt
₹ 100
Value Research
Stars
1 Y Return
38.60
3 Y Return
89.64
5 Y Return
215.76
ICICI Pru Retirement Fund - Hybrid AP - Dir (G)
Retirement Fund
NAV
26.33
Min. SIP Amt
₹ 100
Value Research
Stars
1 Y Return
47.64
3 Y Return
89.30
5 Y Return
155.70
SBI Retirement Benefit Fund-Aggressive Plan-Dir(G)
Retirement Fund
NAV
21.23
Min. SIP Amt
₹ 500
Value Research
Stars
1 Y Return
32.70
3 Y Return
83.41
5 Y Return
0
HDFC Retirement Savings Fund - Equity (G)
Retirement Fund
NAV
49.38
Min. SIP Amt
₹ 100
Value Research
Stars
1 Y Return
37.03
3 Y Return
82.91
5 Y Return
197.07
ICICI Pru Retirement Fund - Hybrid AP (G)
Retirement Fund
NAV
24.18
Min. SIP Amt
₹ 100
Value Research
Stars
1 Y Return
45.47
3 Y Return
81.48
5 Y Return
136.59
SBI Retirement Benefit Fund-Aggressive Plan (G)
Retirement Fund
NAV
20.26
Min. SIP Amt
₹ 500
Value Research
Stars
1 Y Return
31.14
3 Y Return
76.32
5 Y Return
0
SBI Retirement Benefit Fund-Aggrs Hyb Plan-Dir(G)
Retirement Fund
NAV
19.43
Min. SIP Amt
₹ 500
Value Research
Stars
1 Y Return
28.43
3 Y Return
71.20
5 Y Return
0
SBI Retirement Benefit Fund-Aggrs Hyb Plan (G)
Retirement Fund
NAV
18.63
Min. SIP Amt
₹ 500
Value Research
Stars
1 Y Return
27.05
3 Y Return
65.25
5 Y Return
0
*These are based on historical performance and are not recommendations. Investors should access their financial goals, risk appetite, and time horizon before investing.

Explore different types of debt funds

Safe-haven for savings

  • Overnight debt funds: Invests in assets maturing in 1 day
  • Liquid debt fund: Invests in assets maturing within 91 days
  • Ultra-short duration fund: Maturity of underlying assets is 3-6 months
  • Low duration fund: Maturity of underlying assets is 6-12 months
  • Money market fund: Invests in highly liquid debt funds maturing in less than 1 year
  • Index debt funds: Long term fund following passive investment strategy

Debt funds for higher returns

  • Banking and PSU: Invest in bonds issued by banks, public institutions and municipality
  • Corporate bond: Invests in AA+ and above rated corporate bonds
  • Short duration: invests in bonds with 1 to 3 years of maturity

High risk - High reward debt funds

  • Credit risk fund: Invests in papers rated AA+ and below
  • Gilt funds: Invests in government securities with varying maturities
  • Gilt with over 10-year constant duration: Invests in 10-year government security

Debt funds for long-term/ Debt funds investing in long-term bonds / Long-lasting debt funds

  • Medium duration: Invests in debt instruments with 2 to 4 years of maturity
  • Medium to long-term: Targets debt investments with 3 to 5 years of maturity
  • Long duration: Invests in debt instruments with 5 year maturity
  • Dynamic bond: Invests depending on interest rate movement.

Debt funds are financial instruments that generate returns by investing in fixed income instruments like corporate, government bonds, commercial papers, certificates of deposits, treasury bills, non-convertible debentures etc. Fund managers invest in these instruments with the intention of earning fixed interest income and principal repayment on maturity. The difference between the buying and selling price of the bonds accounts for the appreciation and depreciation of the debt fund's net asset value (NAV).

Debt funds generate returns in two ways - interest payments from debt holdings and increase in bond prices whenever interest rates fall. The capital gain/loss, also known as mark-to-market (MTM) return, depends on interest rate fluctuations. Increasing interest rates result in capital loss as bond prices fall, and interest rate increase results in capital gain as bond prices rise.

The capital gain/loss that debt funds generate also depends on the average maturity of the bond holdings. Funds with exposure to long-term bonds experience a significant increase in net asset value whenever market yield or interest rate fall. Debt funds with exposure to short-term bonds show limited capital gain/losses. Such funds make most of their money from interest payments on investing in lower-rated bonds. Bonds with lower credit ratings tend to pay more coupon income to attract investors.

Best performing debt funds find a balance by investing in bonds with varying maturity dates and credit ratings. Thus, funds exposed to long-term debt tend to generate more capital gains during falling interest rates. On the other hand, funds looking for stable coupon income would invest in debt instruments with higher credit ratings, like AAA or AA+ debt.

Who should invest in debt funds?


  • Investors with low-risk appetite and short to medium term investment horizon

  • Investors with low-risk appetite and short to medium term investment horizon

  • Investors with low-risk appetite and short to medium term investment horizon

  • Investors with low-risk appetite and short to medium term investment horizon

Checklist to investing in debt funds


  • Expense ratio
    This is the cost incurred in running a debt fund. It covers portfolio management, administration, marketing, and other costs. High expense ratio reduces your portfolio returns. So, look for funds with expense ratios below 1%.

  • Maturity date
    Debt funds are susceptible to interest rate fluctuations. Debt funds with exposure to long-term bonds tend to do well in a declining interest rate environment. Likewise, debt funds exposed to short-term bonds perform well in high interest-rate environment.

  • Credit risk
    This is a risk that arises when the borrower fails to pay interest and principal upon maturity. Credit risk debt funds offer higher coupon but are not recommended for risk-averse investors. Only highly aggressive investors should opt for credit risk funds.

  • Interest rates
    Interest rate influences debt fund returns. The best time to invest is when interest rates are expected to fall as bond prices tend to increase, which has a positive impact on debt funds’ net asset value (NAV).

Taxation of debt funds

Holding period Type of gain Tax rate
Less than 36 months Short term capital gains (STCG) As per income tax slab
More than 36 months Long term capital gains (LTCG) 20% with indexation

FAQs on Debt Mutual Funds

Debt funds invest in fixed income instruments, which carry a higher degree of safety compared to stocks. So, yes debt mutual funds are safer compared to equities.

While debt mutual funds are less risky than equities, they are prone to interest rates, credit, and liquidity risks.

Inflation levels in India are slowly stabilizing and oil prices have come off their peak. Thus, interest rate hikes are expected to ease off. So, this can be a good time to invest in debt mutual funds that cater to market volatility and fluctuating interest rates.

Both equity and debt funds cater to different risk profiles and investment objectives. While debt mutual funds are ideal for investors who want steady income, equity mutual funds are perfect for investors looking to get capital appreciation at medium to high risk.

One can invest in debt funds through lumpsum investment or systematic investment plans offered by brokers like m.Stock at zero commissions.

Short term capital gains from debt funds are taxed as per the investor’s income tax slab. Whereas long term capital gains are taxed at 20% after indexation on the purchase price.

Yes, dividends earned from debt funds are taxable. They are added to an investor's total income and taxed at the individual income tax slab rate.

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