Best debt mutual fund schemes can be your secret weapon to generate steady and guaranteed income with minimal tax implications – if you choose to do so wisely! Unlike their uncertain equity counterparts or fixed deposits with hardly any yields, these schemes offer good capital safety with tax-efficient growth making them the appropriate investments for cautious investors, retirees or anyone looking for an assured income. Choose wisely between the debt mutual funds under new tax laws (LTCG applicable after three years only) and also heightened risk criteria established by SEBI.
In this guide, we will tell you how to sift through the noise and tell the top funds from low-risk Banking & PSU options to high-yield corporate bonds while doing so post-tax. Regardless of whether you seek monthly income over the long haul, greater financial security for the future, or a tax-efficient alternative to fixed deposits, the top debt mutual funds will help you achieve your goals without causing you any worries. Let’s get started!
Why Debt Mutual Funds for Long-Term Investing?
Are you looking for some rupee income on a steady basis but would not want to get involved in the often-stormy waters of the stock market? Debt mutual funds may be for you. While the stock markets see bloodbath volatility and the interest rate on fixed deposits are pathetically low to beat rising inflation, debt fund net asset values navigate the safe path, offering humble yet steady returns along with higher possibilities of appreciation.
The most interesting part is that, more than being a low-risk proposition, they are good decisions to make. The wise investment will give you higher post-tax returns than FDs and ensure that your money is preserved, Safe? Let’s dig deeper.
Steady Income At Better Returns Than FDs
Thinking fixed deposits about the strongest of the lot? Double-check that. Although bank deposits can assure you of capital safety, the returns offered by them in the prevailing interest rates (6-7%) often do not compensate even for the inflation in the given amount of time after paying taxes.
The debt mutual funds: Offer returns in the range of 7-9% over the top-performing categories (like the Banking & PSU funds).
- Do not have TDS deductions (in contrast with FDs, which attract tax deductions at source).
- Provide the best in terms of liquidity with no early withdrawal penalties.
Along with providing what looks like saving funds’ security for an even greater chance for higher growth, these can be even more attractive when used for maintaining wealth over the long term.
Tax Efficiency – Lower Than Fixed Deposits?
That is the strength of a debt fund. Under reforming of tax law in 2023, LTCG (long-term capital gains) on debt funds held for more than 3 years are taxed at 20% with indexation, which is a big plus for debt funds compared to FDs, where the interest is taxed at your applicable income tax slab.
| Investment | Pre-Tax Return | Post-Tax Return (30% slab) |
|---|---|---|
| FD (7%) | 7% | 4.9% (after 30% tax) |
| Debt Fund (8%) | 8% | ~7.2% (after LTCG + indexation) |
Ideal for Retirees & Conservative Investors
Why is that?
- Historical returns (not dependent on the stock market).
- Has lesser volatility than hybrid/equity schemes.
- Options for monthly income (through Systematic Withdrawal Plans—SWPs).
Debt Mutual Fund Categories
Overnight Fund
Maturity: 1 day (lowest risk)
Invests In: Overnight securities (CBLO, T-Bills)
Returns: ~5-6%
Best For: Parking emergency funds (better than savings accounts).
Liquid Fund
Maturity: Up to 91 days
Invests In: T-Bills, CPs, CDs
Returns: ~6-7%
Best For: Short-term goals (3-6 months), corporate treasuries.
Ultra Short Duration Fund
Maturity: 3-6 months
Invests In: Commercial papers, short-term bonds
Returns: ~6.5-7.5%
Best For: 6-12 month horizon (higher returns than FDs).
Low Duration Fund
Maturity: 6-12 months
Invests In: Mix of short-term bonds & money market instruments
Returns: ~7-8%
Best For: Conservative investors with 1-year goals.
Money Market Fund
Maturity: Up to 1 year
Invests In: T-Bills, CDs, CPs
Returns: ~6.5-7.5%
Best For: Alternative to short-term FDs.
Short Duration Fund
Maturity: 1-3 years
Invests In: Corporate bonds, govt. securities
Returns: ~7-8.5%
Best For: Medium-term investors (2-3 years).
Medium Duration Fund
Maturity: 3-4 years
Invests In: Mix of corporate & govt. bonds
Returns: ~7.5-9%
Best For: Investors comfortable with mild interest rate risk.
Medium to Long Duration Fund
Maturity: 4-7 years
Invests In: Long-term bonds (govt. & corporate)
Returns: ~8-9.5%
Best For: Long-term investors (5Y+) who can handle volatility.
Long Duration Fund
Maturity: 7+ years
Invests In: Long-dated govt. bonds
Returns: ~8-10% (but highly rate-sensitive)
Best For: Aggressive debt investors betting on rate cuts.
Dynamic Bond Fund
Maturity: Actively managed (varies)
Invests In: Mix of short & long-term bonds
Returns: ~7-9%
Best For: Experts who trust fund managers to time interest rates.
Corporate Bond Fund
Maturity: 3+ years
Invests In: AAA/A+ rated corporate bonds
Returns: ~7.5-9%
Best For: Higher returns than FDs with moderate risk.
Credit Risk Fund
Maturity: 3+ years
Invests In: Lower-rated bonds (AA & below)
Returns: ~9-11% (but high default risk)
Best For: Aggressive investors okay with credit risk.
Banking & PSU Fund
Maturity: 3+ years
Invests In: Bonds from banks, PSUs, govt. entities
Returns: ~7.5-8.5%
Best For: Safe investors (lower credit risk).
Gilt Fund
Maturity: 10+ years (govt. securities only)
Invests In: Sovereign bonds (zero default risk)
Returns: ~7-9% (but rate-sensitive)
Best For: Investors betting on RBI rate cuts.
Floater Fund
Maturity: Short to medium term
Invests In: Floating-rate bonds (reset with market rates)
Returns: ~7-8%
Best For: Rising interest rate scenarios.
Confused by Debt Funds? This 1-Page Cheatsheet Will Make It Crystal Clear – Download Now!
(Investment: ₹50,00,000 | Assumed Returns:
FD @ 7% vs Debt Fund @ 7.5%)
When investments are compared, a lot of investors consider Fixed Deposits and the Best Debt Mutual Funds for returns and tax efficiency. Deposits offer a sure annual income of 7% but are taxed at the end of every year with respect to the slab of your income and thus leave you with a lesser clear gain if you are in a higher income scene. The Best Debt Mutual Fund gives a bit higher return around 7.5% but gives huge tax benefits if held beyond the period of three years. Short-term capital gains generally go the same way as FD taxation, while long-term gains on debt funds are taxed at 20% after indexation—lowering significantly amounts for tax purpose because it has considered the inflation factor. For instance, a 3-year FD investment will leave you with 7.35 lakhs post-tax, whereas the Best Debt Mutual Funds can give as much as 10.65 lakhs post-tax. Also, FDs usually have a penalty for premature withdrawal, while debt funds usually have no exit load after a year. FDs have zero market risks but debt mutual funds carry low risks and are a little sensitive to interest rate changes. Overall, these are the Best Debt Mutual Funds, which form an excellent base for long-term investments with better returns and liquidity, as well as tax-efficient investments.
| Parameter | Fixed Deposit (FD) | Debt Mutual Fund |
|---|---|---|
| Pre-Tax Return (Annual) | ₹3,50,000 (7%) | ₹3,75,000 (7.5%)* |
| Taxation (STCG) (Held < 3 years) | Interest taxed as income tax slab rate (e.g., 30% = ₹1,05,000 tax). | Gains taxed at slab rate (30% = ₹1,12,500 tax). |
| Taxation (LTCG) (Held ≥ 3 years) | Interest taxed yearly (no LTCG benefit). | Gains taxed at 20% with indexation (reduces taxable amount). |
| Net Return (STCG) (1-Year Holding) | ₹2,45,000 (7% - 30% tax). | ₹2,62,500 (7.5% - 30% tax). |
| Net Return (LTCG) (3-Year Holding) | ₹10,50,000 (₹3.5L/year × 3, taxed yearly @ 30% = ₹3.15L tax). Net: ₹7,35,000. | ₹11,25,000 (₹3.75L/year × 3). Taxable gain after indexation (assume 5% inflation): ₹11.25L - ₹8.25L (indexed cost) = ₹3L. Tax @ 20% = ₹60,000. Net: ₹10,65,000. |
| Liquidity | Penalty on premature withdrawal. | No exit load after 1 year (STCG still applies). |
| Risk | Zero market risk. | Low risk but sensitive to interest rate changes. |
Top 10 Debt funds as on Mach 2025
| Name | NAV | AUM (in Cr.) | 1 Yr Returns | 3 Yr Returns | 5 Yr Returns | Exp Ratio | Min Lumpsum |
|---|---|---|---|---|---|---|---|
| Aditya Birla Sun Life Medium Term Plan Fund Direct – Growth | ₹42.34 | ₹2,177.40 | 14.51% | 14.76% | 13.02% | 0.86% | ₹1,000 |
| DSP Credit Risk Fund Direct – Growth | ₹52.75 | ₹206.52 | 22.91% | 14.52% | 11.55% | 0.40% | ₹100 |
| Aditya Birla Sun Life Credit Risk Fund Direct – Growth | ₹23.85 | ₹967.06 | 17.64% | 11.39% | 10.16% | 0.67% | ₹100 |
| UTI Dynamic Bond Fund Direct - Growth | ₹33.16 | ₹447.06 | 10.10% | 10.36% | 10.11% | 0.94% | ₹500 |
| Bank of India Credit Risk Fund Direct - Growth | ₹12.31 | ₹112.62 | 5.80% | 5.72% | 10.01% | 0.96% | ₹5,000 |
| JM Low Duration Fund Direct - Growth | ₹37.39 | ₹226.52 | 6.89% | 9.84% | 7.95% | 0.35% | ₹5,000 |
| Baroda BNP Paribas Credit Risk Fund Direct - Growth | ₹23.90 | ₹176.33 | 9.55% | 7.95% | 8.90% | 0.60% | ₹1,000 |
| ICICI Prudential Credit Risk Fund Direct - Growth | ₹33.28 | ₹6,459.90 | 13.18% | 9.74% | 9.95% | 0.76% | ₹5,000 |
| Nippon India Credit Risk Fund Direct - Growth | ₹22.40 | ₹1,309.38 | 8.67% | 7.68% | 8.11% | 0.72% | ₹500 |
| HDFC Credit Risk Debt Fund Direct - Growth | ₹32.80 | ₹5,037.20 | 9.23% | 7.84% | 9.05% | 0.76% | ₹100 |
Good work done.Easy and interesting.
A comprehensive coverage on debt funds, Very useful for debt investments for stable income.
Dear Asheesh,
Very well explained and informative article on Debt mutual fund. It’s a different approach all together to look debt fund vs Equity fund.
Thank for the information to make me understand in a very simple way .