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Debt Funds in India

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Top Debt Funds in India for long-term growth

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List of Debt Mutual Funds in 2024

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Fund name
AUM
1Y CAGR
3Y CAGR
Till Date CAGR
bandhan-bank-logo
Bandhan CRISIL IBX Gilt April 2028 Index fund (G)

5001.742 Cr

6.5%

5%

5.4%

aditya-birla-sun-life-logo
Aditya Birla Sun Life Nifty SDL Plus PSU Bond Sep 26 60 40 fund (G)

10797.638 Cr

6.8%

-

4.8%

icici-prudential-logo
ICICI Prudential Liquid Fund (G)

46422.699 Cr

7.3%

5.7%

7.1%

hdfc-logo
HDFC Floating Rate Debt Plan (G)

14535.71 Cr

7.9%

6%

7.8%

reliance-nippon-life-logo
Nippon India Arbitrage Fund (G)

15157.753 Cr

7.8%

5.7%

6.9%

edelweiss-logo
BHARAT Bond FOF April 2031 fund (G)

4554.128 Cr

6.6%

5.3%

5.3%

aditya-birla-sun-life-logo
Aditya Birla Sun Life Savings Fund (G)

13579.619 Cr

7.4%

5.9%

7.4%

edelweiss-logo
BHARAT Bond FOF April 2030 fund (G)

6767.585 Cr

6.6%

5.6%

7.3%

edelweiss-logo
BHARAT Bond ETF FOF April 2032 (G)

4373.511 Cr

6.2%

-

5.7%

kotak-mahindra-logo
Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund (G)

8038.047 Cr

7%

-

5.3%

hdfc-logo
HDFC Overnight fund (G)

11144.032 Cr

6.7%

5.3%

5.9%

aditya-birla-sun-life-logo
Aditya Birla Sun Life Money Manager Fund (G)

23737.599 Cr

7.5%

6%

6.8%

reliance-nippon-life-logo
Nippon India Banking & PSU Debt Fund (G)

5628.094 Cr

6.7%

5.2%

7.3%

uti-logo
UTI Liquid (G)

28028.736 Cr

7.3%

5.7%

6.9%

kotak-mahindra-logo
Kotak Savings Fund (G)

12840.695 Cr

6.9%

5.5%

7.2%

icici-prudential-logo
ICICI Prudential Banking and PSU Debt Fund (G)

9403.804 Cr

7.3%

5.8%

7.9%

axis-logo
Axis Dynamic Bond Fund (G)

1737.246 Cr

6.4%

4.8%

7.9%

icici-prudential-logo
ICICI Prudential Ultra Short Term Fund (G)

12302.045 Cr

7.2%

5.7%

7.5%

reliance-nippon-life-logo
Nippon India Nivesh Lakshya Fund (G)

7706.428 Cr

7.4%

5.9%

8.7%

icici-prudential-logo
ICICI Prudential Short Term Fund (G)

18252.312 Cr

7.3%

5.8%

7.8%

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Debt funds are mutual fund schemes that invest a major portion of the pooled corpus of money in debt or fixed-income instruments. Examples of such instruments are corporate bonds, debentures, government securities, and money market instruments like treasury bills, commercial papers, and certificates of deposits.

Types of Debt Funds

  • Liquid funds: Debt funds that invest in short-term money market instruments, providing high liquidity and aiming for capital preservation.
  • Banking and PSU Funds: Debt funds that primarily invest in fixed-income securities issued by banks and public sector undertakings (PSUs) to offer a relatively safer investment option with stable returns.
  • Ultra Short-Term Funds: Debt funds that invest in fixed-income instruments with very short durations, usually less than one year, offering stability and slightly higher returns compared to liquid funds.
  • Short-Term Debt Funds: Debt funds that primarily invest in fixed-income securities with shorter maturities, typically less than three years, to provide stability and liquidity.
  • Low Duration Funds: Debt funds that invest in fixed-income securities with relatively shorter durations, aiming to minimise interest rate risk while providing higher returns than liquid funds.
  • Medium Duration Funds: Debt funds that invest in fixed-income securities with intermediate durations, striking a balance between income generation and interest rate risk.
  • Long Duration Funds: Debt funds that invest in fixed-income securities with longer durations, aiming to benefit from potential capital gains due to interest rate movements while being exposed to higher interest rate risk.
  • Government Bond Funds: Debt funds that invest in fixed-income securities issued by the government to generate steady returns and minimise credit risk.
  • Corporate Bond Funds: Debt funds that invest in fixed-income securities issued by corporations to generate regular income while managing credit risk.
  • Credit Risk Fund: Debt funds that focus on investing in lower-rated or unrated debt securities, aiming to generate higher returns by taking on additional credit risk.
  • Dynamic Bond Funds: Debt funds that have the flexibility to invest across various durations and debt instruments to optimise returns based on changing interest rate and market conditions.
  • Fixed Maturity Plans (FMPs): Debt funds with a predefined maturity period and portfolio that invest in fixed-income instruments to align with the fund’s duration.
  • Income Funds: Debt funds that aim to provide regular income by investing in a mix of fixed-income securities across durations and credit quality.
  • Money Market Funds: Debt funds that primarily invest in short-term, high-quality debt instruments and money market instruments, aiming to provide liquidity and capital preservation to investors.
  • Floater funds: Floater funds primarily invest in floating rate securities, where the interest rates are periodically adjusted, offering potential for higher returns in a rising interest rate environment.
  • Overnight Funds: Overnight funds are mutual funds that invest in very short-term debt securities with a maturity of one day, providing investors with high liquidity and low interest rate risk.
  • Gilt Funds: Debt funds that exclusively invest in government securities, providing low credit risk but subject to interest rate risk.

Features of Debt Funds

  • Debt Funds have the Lowest Risk:
    Debt funds are not directly impacted by share market fluctuations. The interest rate regime in the economy and its movements impact debt funds. However, the interest rate movements are not as drastic as share market movements. Moreover, debt funds invest in fixed-income securities that have a known interest rate and maturity value. Thus, debt funds have lower risk when compared to equity funds.
  • Debt Funds have a Low Capital Appreciation:
    The investment aims to provide safe and steady returns. They invest in fixed-income securities that pay a steady interest amount. The debt issuer company only repays back the loan amount. Moreover, it grows through reinvesting the interest income and maturity amount.
  • Debt Funds have a Duration:
    In the debt mutual fund, the underlying bonds and debt instruments have a fixed maturity period. All fixed-income securities have a duration. In layman terms, the ‘duration’ is the time period an investor has to wait to get back all his invested money in the bond by way of periodic interest as well as the principal repayments. Thus, all debt mutual funds have a specific duration that ranges for 1 day in case of overnight funds to 10 years in case of “Gilt Funds with 10-year fixed duration”.
  • The Underlying Debt Securities are Rated for Credit Quality:
    Unlike equity mutual funds, most of the underlying fixed-income securities in debt funds are rated for credit quality. For example, corporate bonds, debentures, and commercial papers are rated by the rating agencies. Whereas, government securities and T-bills are backed by the Government of India. Low-risk debt funds invest in the highest AAA rated fixed-income securities. Corporate bond funds and Credit risk funds can invest in lower-rated fixed-income securities.

Benefits of Investing in Debt Funds

  • Stable Income: Debt Funds generate returns majorly through interest income and maturity value received from the underlying fixed-income securities. Both, interest rate and maturity value are fixed and hence debt funds provide a stable and regular stream of cash flow without the risk of market fluctuations.
  • Safer Investment Option: Debt funds are a safe investment option for conservative investors whose priority is to have a fixed interest income, not capital appreciation. Investors having lower-risk appetite benefit from the credit quality and lower volatility offered by it.
  • Tax Efficiency: Until March 31st 2023, Debt funds are more tax-efficient than traditional investment options like fixed deposits (FDs). In FDs, the interest income is taxed each year. Whereas, the debt funds are taxed in the year you redeem. You pay Short Term Capital Gains (STCG) tax if you held debt fund investments for less than three years. Long-Term Capital Gains (LTCG), along with indexation benefits, are applicable for investments beyond three years.
    From April 1st 2023, capital gains from debt mutual funds investments will be taxed as per the investor’s income tax slab rate. In the Finance Bill 2023, the LTCG benefit for debt mutual funds has been removed.
  • Liquidity: Debt mutual funds allow you to redeem your units and have your money back on any business day. Which is not possible in case of FD investment. Fixed deposits have a specified maturity date. If you liquidate FD prematurely, the bank will charge you a 1% penalty.
  • Offers Portfolio Stability: Your investment portfolio can earn higher returns from equity funds, but it comes with the volatility challenge. Adding debt funds diversifies your portfolio and bring down the overall risk.

Who Should Invest in Debt Mutual Funds in India?

  1. Risk-Averse Investors
    Debt fund returns are predictable, in the sense you know the interest income and the maturity value beforehand. Thus, returns from them are in a range. This makes them safer avenues for conservative investors. The risk of investing in debt mutual funds is lower than equity funds because they do not have market fluctuations.
  2. Investors with Short to Medium Term Investment Horizon
    The underlying debt securities have a maximum maturity of 10 years. Debt funds are better suited to the financial goals that need an assured amount of money like repayment of a loan, buying a car or money for the vacation. These goals are short to medium-term in nature. Hence, debt funds are best for investors looking to fulfill short to medium-term financial needs.
  3. Investors Looking for Portfolio Diversification
    Having only equity funds in your investment portfolio can be risky. Instead of putting all the amount in equity funds, you can diversify/ lower the risk by investing in debt funds. The debt component helps you to cushion any downside risk of returns and works effectively in reducing the overall portfolio risk.

Different Ways to Invest in Debt Funds

1. Through an Online Mutual Fund Investment Platform

An online mutual fund investment platform is a paperless, quick and hassle-free way of investing in mutual funds. You just need to create an account for handling all your mutual fund investments.

For example, Scripbox is an online mutual fund investment, tracking, management, and redemption platform.

The steps required for investing in debt funds using an online investment platform are;

  • Create an account with the investment platform
  • Create/ Pick up the scheme or plan
  • Choose the payment type (SIP or lump-sum) and the amount
  • Fill in the few personal details like PAN and bank details
  • Transfer money online to complete the investment

2. Through the Asset Management Company (AMC)

Mutual funds investment can be done directly online and offline through a mutual fund house or the AMC.

A. For an online investment

You can visit the AMC website, the process involves;

  • Opening a new account
  • Provide personal details for the investment
  • Provide bank details
  • Upload image of the canceled cheque
  • Verify KYC through Aadhar and transfer money

B. For an offline investment

For offline investment, you need to visit the local office and submit the investment application form along with the required KYC documents.

3. Using Demat Account

Existing Demat account can be used for investing and transacting in the mutual fund, provided your broker provides a mutual fund investment facility. For that, your broker needs to be a mutual fund distributor.

For investing, log-in to your Demat account and look for the option to invest in the mutual fund. In the next step, you need to choose the mutual fund schemes in which you want to invest.

4. Agent

This method is not recommended because it is costly and time-consuming.

The process involves;

  • Calling your agent (a mutual fund distributor)
  • Hand over the filled-in application form along with a copy of all the KYC documents, and canceled cheque.

How to Invest in Debt Funds Online?

The stepwise method for investing in debt funds through Scripbox is as under;

Step 1. Visit Scripbox and Choose a Life Goal

  • Scripbox is an online mutual fund investment website. Click on “Let’s Get Started” to choose a life goal.
  • Select “Achieve life goals” and in the next step click option “Dream Planner” as shown below;
  • On the next page, you will have a list of lifestyle goals. For investing in debt funds, you can pick any of the lifestyle goals.
  • The example has selected the goal “Loan Closure”.

Step 2. Create an Investment Plan

  • For creating a plan, you need to provide information like the amount required and the time to reach the goal.
  • The example plan has a goal (loan repayment) amount of Rs. 3 Lakhs and the 3 years as the time frame. Click on “Continue” to proceed ahead.
  • If you have made any savings for the goal then you can add the amount in the option shown above or else click on “Show Plan For”. In the next step you will get the short plan details as under;
  • On this page, you will see the monthly SIP amount required for meeting the goal. Scripbox gives you the option to increase SIP every year. The example has taken a 5% increase in SIP. You have the flexibility to vary the percentage.
  • Click on the “Start with” box to proceed ahead.
  • The summary of the lifestyle goal of “Loan closure” is shown on this page. Check all the details before you click on “Continue”.

Step 3. Signup and Create an Account

  • Before you proceed with debt fund investment, Scripbox asks you to have an online account. The account helps you to invest, track, and manage all your mutual fund investments from a single account.
  • You can create an account using your email ID and password.

Step 4. Payment Method Selection

  • When you log in, you will get the webpage as under;
  • Here you need to select the payment option between SIP and Lump-sum. SIP is a better option, as you invest a small amount regularly.
  • If you have a surplus amount then you can invest in a lump-sum. Choose the option that suits your cash flows.
  • The example has taken the SIP payment method.
  • Next, you will get the detailed dream plan for “Loan closure” showing investment in best debt funds. If you want, you have the option to change the fund or amount allocation through the option below.
  • Or you can click “Continue to invest”.

Step 5. Bank Account Details & Money Transfer

In the final step, you need to provide the bank details for investing in debt funds. The bank account will be used for investing and crediting redemption proceeds directly with the AMC.

Difference between Debt Funds and Fixed Deposits

Fixed deposits are the most popular form of investment among many investors. That is understandable because they are safe, predictable, and completely take the guesswork out of the equation.

Some of the main differences between debt mutual funds and fixed deposits are as follows:

  • Fixed deposits typically require a lump sum amount to be deposited at once while you can choose the option of SIP for debt mutual funds. 
  • The return on debt funds is higher than fixed deposits as debt funds are subject to higher risk compared to fixed deposits.
  • The investments in fixed deposit might not allow withdrawal before maturity but you can withdraw money from your debt mutual fund account as per your requirement. 
  • Fixed deposits and debt funds are taxed very differently. The income from investments in fixed deposits is taxed as per the income tax slab applicable to you.

Difference between Debt Funds and Equity Funds

Debt mutual funds invest in debt securities such as corporate bonds, treasury bills. 

Equity funds, on the other hand, predominantly invest in equity shares of different companies traded in the stock market.

For this reason, equity mutual funds have different risk and higher risk profile but compensate with higher returns.

Debt funds have largely predictable returns, whereas, the return on equity funds vastly depends.

Explore Debt Funds by AMC