Top Performing Debt Mutual Funds to Invest in India

Not every mutual fund investor has the same goal, and many don’t want the high-risk, high-return equity funds. Debt mutual funds make it possible to achieve stable, consistent returns.  

Debt funds are available for conservative investors as well as for those looking for intermittent income. In this article, we will see what are debt funds, how debt funds work, and discuss some best debt mutual funds and the best debt funds to invest in India for the year 2025.  

 

What Are Debt Mutual Funds?

Fixed-income assets such as bonds, government bonds, corporate debt etc are the main emphasis of debt mutual funds. Debt funds are those that lend your money to businesses and the government in exchange for interest. The returns on debt funds are much safer and more consistent than equity returns. Hence, they are suited for investors with a low to moderate risk tolerance. 

 

Types of Debt Mutual Funds

Debt mutual funds are categorised based on the maturity period and the type of securities. Here are some popular debt fund categories.  

 

Type of Debt Fund	Investment Horizon	Description
Overnight & Liquid Funds	Up to 3 months	For very short-term parking of money with quick liquidity.
Ultra Short-Term & Low Duration Funds	3–12 months	Slightly higher returns than savings accounts, minimal volatility.
Short Term Debt Funds	1–3 years	Ideal for moderate-term goals, better stability and returns.
Corporate Bond Funds	2–5 years	Invests in high-rated corporate bonds, good balance of risk and reward.
Gilt Funds	3–10 years	Invests in government securities, zero credit risk, but interest rate sensitive.
Dynamic Bond Funds	Flexible	Adjust duration based on market outlook, suitable for experienced investors.

 

 

Why Invest in Debt Funds?

• They are more stable in comparison to volatile equity funds. 

• You can redeem your units anytime (excluding closed-ended funds). 

• Debt funds can help lower the risk in your portfolio and balance it with low-risk instruments.  

• Long-term investors will enjoy taxed capital gains with indexation benefits after 3 years.  

• Retirees and those who have short-term goals.

 

Best Debt Mutual Funds in India (2025)

The following list highlights some of the top debt funds and best debt mutual funds focusing particularly on a 3-year track record, stability, and credit quality (as of Q4 2025):  

 

Fund Name	Category	3-Year CAGR (%)	AUM (₹ Cr)
HDFC Short Term Debt Fund	Short Term Debt Fund	7.8%	20,000+
ICICI Prudential Corporate Bond Fund	Corporate Bond Fund	7.6%	19,500+
Axis Treasury Advantage Fund	Low Duration Fund	7.2%	8,200+
SBI Magnum Gilt Fund	Gilt Fund	7.9%	5,900+
Kotak Dynamic Bond Fund	Dynamic Bond Fund	7.4%	10,500+
Nippon India Short Term Fund	Short Term Debt Fund	7.7%	7,000+
Aditya Birla Sun Life Corporate Bond Fund	Corporate Bond Fund	7.5%	16,800+

 

(Source: Value Research, November 2025)

The best debt funds have shown consistent performance and keep strong credit portfolios along with active professional fund management.

 

How Do Debt Funds Work?

When you invest in a debt mutual fund, money from you and other investors is used to purchase and invest in fixed-return debt instruments. A fund manager is in charge of making investment decisions based on the interest rate and other prevailing market conditions.  

 

A debt fund's Net Asset Value (NAV) is affected by the:  

• Movement of interest rates. 

• Credit quality of underlying securities.  

• Demand for bonds in the market. 

 

Short Term Debt Funds – The Safe Zone

Short term debt funds are the choice for everyone with a 1 to 3-year investment horizon. They invest in bonds and money market instruments with shorter maturities, thereby lessening the risk of interest rate fluctuations.

Some best short term debt funds are:

• HDFC Short Term Debt Fund.

• Kotak Short Term Fund.

• Nippon India Short Term Fund.

These are perfect for objectives like creating an emergency fund, getting ready for a vacation, or setting aside money for a future need.

 

Who Should Invest in Debt Funds?

Debt funds are suitable for:  

• Low-risk and steady returns type Investors.

• Those with short to medium term goals (six months to three years).

• Regular Income with low volatility - Retirees.

• Safe Assets Inclusion - Portfolio Diversification.  

 

Taxation on Debt Mutual Funds

In the case of Debt Mutual Funds, the following taxation is present.

Short-term capital gains (STCG): Holding the asset for less than 3 years means you will be taxed based on the income slab you are in. 

Long-term capital gains (LTCG): Holding the asset for more than 3 years means you will only be taxed 20% on the gains and the gains will be more tax efficient each year due to it being taxed during indexation. 

 

Selecting the best Debt Mutual Funds

1. Fund Duration - Ensure you will have the investment closed to the time of the fund maturity you select.

2. Credit Quality - Choose Funds with instruments rated at AAA and Sovereign.

3. Performance - Look at the 3 year and 5 year rolling returns to see the growth of the fund.

4. Check the Expense Ratio - The lower the expense ratio, the better your overall returns will be. 

5. Look for Consistency, Not Flashy Returns- Steady, predictable returns are the mark of a better fund, not one with a history of fluctuating performance.  

 

 

Conclusion

Investing in debt mutual funds offers the safety, liquidity, and predictable returns many investors tend to look for. These instruments, be it short term debt funds or long-duration debt funds, are great for balancing your portfolio and providing predictable income.

The best debt mutual funds in India exhibit top credit quality, effective fund management, and a solid track record. When it comes to investing, your first step should be to identify the top debt funds that match your objectives and risk tolerance.

 

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.