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Debt Mutual Funds
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Debt Mutual Funds

Mutual funds are today’s popular investment options that come in many types to fit into the needs of any investor. Mutual funds are classified based on the asset class, investment goals, based on structure and risk, etc.

Debt Mutual Funds

Based on asset class, mutual funds are classified as equity funds, debt funds, and hybrid funds. If you are low to moderate risk taker, you can think of debt mutual funds that invest the majority of their corpus into debt securities. Let’s learn more about debt mutual funds.

What are Debt Funds?

Debt funds are the type of mutual funds that predominantly invests in infixed income-bearing securities such as corporate bonds, debentures, government securities, money market instruments, and corporate debt securities, etc. Hence, debt funds are suitable for investors looking for stable, regular income with low risk-taking ability. Debt funds are categorized into many types such as liquid funds, low-duration funds, money-market funds, Banking & PSU funds, corporate bond funds, short-term funds, medium duration funds, credit risk funds, and dynamic funds, etc.

What are Debt Funds

Investing in debt mutual funds is a popular strategy for diversification. Learn about the benefits of investing in debt mutual funds.

The suitability of each of these categories varies as the fund objective varies from category to category. You need to make the right choice depending on your investment goals, time duration, and risk appetite. In comparison to other fixed income-bearing instruments, debt funds offer a higher level of flexibility and liquidity. There are some unique benefits of investing in the best debt mutual funds for your short-term to medium-term goals. Let’s take a look at the advantages offered by debt funds:

Benefits of Debt Funds

The following are the benefits of investing in the best debt mutual funds:


Debt funds are relatively less risky in comparison to equity-oriented funds. As they invest in fixed-income securities, you can expect stable and regular returns. Investing in the best debt mutual funds brings stability to your investment portfolio. Though returns from debt mutual funds are linked to the market and are not guaranteed, but are stable and predictable.

Reduced risk

The risk appetite of every investor keeps changing with the changing phase of life. With the increased responsibilities, it is important to manage the overall risk of your investment portfolio. You can achieve this by investing a portion of your portfolio in debt mutual funds. Being low-risk investment options, debt mutual funds can generate reasonable returns along with reducing the overall portfolio risk.

Greater flexibility

There are debt funds for each of your needs. If you have a corpus that you need after 6 months, the best way to invest that is by parking it in short-term debt funds. You can invest online with much ease and through a simple process. You can redeem it as and when you need the money. If you do not want to invest a lump sum, you can start systematic investment plans and invest in debt funds monthly. You can also set up a systematic withdrawal plan for your debt mutual fund to withdraw money systematically based on your needs. You can even set up a systematic transfer plan to transfer money regularly from debt fund to equity fund at regular intervals and use them as a hedge against volatility in the equity market.

Higher liquidity

Debt funds are highly liquid in nature which you can withdraw anytime to meet your urgent liquidity needs. In comparison to other fixed-income investments, debt funds are easier to redeem without any paperwork, restrictions, or penalty, which makes them extremely liquid.


Compared to equity mutual funds, debt funds come with lower transaction costs. Unlike other fixed-income instruments, there is no penalty for the redemption of most of the debt funds

Apart from these benefits, debt mutual funds also can deliver reasonable returns. Unlike other traditional investment products suitable for moderate to low-risk seeking investors, debt funds are tax-efficient in nature. Short-term capital gains (redeemed within 3 years) are taxed as per your income tax slab rate and long-term capital gains (redeemed after 3 years) are taxed at a 20% rate after indexation. Let’s take a look at the performance of some of the top debt funds.

Top 10 Performing Debt Mutual Funds

Fund Name

Returns Expense Ratio
1-year 3-years


Axis Banking & PSU Debt Fund

3.88% 6.53% 7.57% 0.33%
ICICI Prudential Corporate Bond Fund 4.70% 7.23% 7.74%


Aditya Birla Sun Life Corporate Bond Fund

4.41% 7.39% 7.59% 0.30%

Nippon India Short-term Fund

5.42% 7.56% 7.84%


Axis Short Term Fund

4.50% 7.15% 7.78% 0.30%
SBI Magnum Medium Duration Fund 5.01% 8.17% 8.68%


Quantum Dynamic Bond Fund 

3.80% 6.25% 6.85% 0.60%
HDFC Low Duration Fund 4.29% 6.32% 6.92%


ICICI Prudential Credit Risk Fund

6.93% 8.68% 8.74% 0.87%
SBI Magnum Income Fund 4.64% 8.07% 8.46%


However, debt mutual fund returns are subjected to market risk. Along with that, debt funds are subjected to credit risk and interest rate risk. Choose the best debt mutual funds based on your investment need, financial goal, and time horizon.

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