Best Debt Funds 2022 - Top 10 Performing Debt Mutual Funds

Updated on: Mar 21st, 2024


10 min read

Debt funds are a type of mutual fund that generate steady income in the form of dividend on the bond funds. There are various types of debt mutual funds that have varying risk-return portfolios, financial goals, and investment horizons. This type of fund is highly liquid and you can consider investing in the best debt mutual funds to get the units redeemed easily.

Debt mutual funds predominantly invest in fixed-income instruments such as treasury bills, corporate bonds, government securities, and other debt and money market instruments.

What are Best Debt Mutual Funds?

Debt mutual funds majorly invest in fixed interest-earning instruments such as treasury bills and certificate of deposits. The main intention of these funds is to generate wealth in the form of interest income and steady appreciation of the capital invested in the long run. The underlying assets generate a fixed rate of interest over the tenure for which investors stay invested in the fund.

A debt fund manager invests predominantly in the underlying assets based on their respective credit ratings. A higher credit rating indicates that debt security has a higher chance of paying interest regularly along with the repayment of the principal upon expiry of the investment tenure. Apart from that, the fund manager aligns his investment strategy as per the interest rate movements.

Features of Debt Mutual Funds

Here are the key features of a debt mutual fund:

  • The risk associated with the debt mutual fund is comparatively lower than other financial instruments like equity funds. Since these schemes offer stability to investors, therefore it is an excellent avenue of investment for new investors.
  • Debt mutual funds do not have a definite lock-in period. As a result, it can be redeemed within one or two days of placing the request for redemption.
  • These funds can be available throughout a variety of credit risk and maturity. There are shorter duration funds, liquid funds, overnight funds, low duration funds, etc.
  • You can get interest as well as capital gains by investing in a debt mutual fund.

Top 10 Best Debt Funds


The table below shows the best-performing debt funds based on the last 5-year returns:

Who Should Invest in Best Debt Mutual Funds?

Debt funds are suitable for risk-averse or for those who are not ready to have equity exposure. Debt funds grow investors’ wealth with little to no risk. Additionally, these funds strive to provide regular income. Investors usually stay invested in debt funds for a short to medium-term horizon.

You need to choose an appropriate debt fund as per your investment horizon. Liquid funds may be suitable for a short-term investor who generally parks his or her surplus funds in a savings bank account. Liquid funds provide returns in the range of 7-9%. They also offer flexibility in terms of withdrawals at any time, just like a regular savings bank account.

If you need to ride the interest rate volatility, then dynamic bond funds may be an ideal option. These funds are suitable for a medium-term investment horizon to earn higher returns than a 5-year bank FD.

Taxation of Debt Fund

The dividends provided by mutual funds were previously made tax-free in the hands of investors until January 2020. The fund house was supposed to pay dividend distribution tax (DDT) at applicable rates before making the dividend payout to the investors. This was changed in the Union Budget 2020. The dividends are now taxed classically. Meaning, the dividends are added to your overall income and taxed as per the income tax slab you fall under.

The rate of taxation of capital gains depends on the holding period. If the debt fund units are sold within a holding period of three years, you make short-term capital gains. These gains are added to your overall income and taxed as per the income tax slab you fall under. You realise long-term capital gains on selling your debt fund units after a holding period of three years. These gains are taxed at a rate of 20% after indexation.

Risks Associated With Debt Funds

Debts funds possess the following risks:

Credit Risk

This is the possibility of the issuer of the debt security not standing by his obligation of returning the principal at the time of maturity, and regular interest payout.

Interest Rate Risk

This is the possibility of the movements in the interest rate offered by the underlying securities of the fund plan.

Liquidity Risk

This is the possibility of the mutual fund house not having sufficient levels of liquidity to cater to the redemption requests.

Things an Investor Should Consider While Investing in Debt Funds

The following are some of the factors that must be considered before investing in debt funds.

Fund Objectives

Debt funds aim at optimising returns by diversifying the portfolio by investing across a variety of securities. You can expect these funds to perform predictably. It is because of this reason that debt funds are suitable for conservative investors.

Fund Category

Debt funds are further classified under various categories such as liquid funds, monthly income plans (MIPs), fixed maturity plans (FMPs), dynamic bond funds, income funds, credit opportunities funds, GILT funds, short-term funds, and ultra short-term funds. These funds come with their own set of objectives to achieve and advantages. You have to assess your requirements and invest in a suitable debt fund.


Debt funds are subject to interest rate risk, credit risk, and liquidity risk. The fund value may fluctuate due to the movement in the overall interest rates. You have to assume these risks when you invest any debt fund plan.


Debt funds charge an expense ratio to manage your investment. No fund house can charge above the limit set by the Securities and Exchange Board of India (SEBI). The expense ratio varies across mutual fund plans.

Investment Horizon

An investment horizon of three months to one year is ideal for liquid funds. If you have a longer horizon of say two to three years, then you can explore short-term bond funds.

Financial Goals

Debt funds can be used to achieve a variety of goals such as earning additional income or for liquidity and earning much higher returns than a regular savings bank account. You have to ensure that your requirements are in with the objectives of the debt fund scheme you are choosing.

How to Evaluate Best Debt Mutual Funds?

The following are some of the factors that must be considered before investing in debt funds.

Fund Returns

It would help if you looked for consistency in returns over long-term, say three, five, or ten years. Choose funds that have outperformed the benchmark and peer funds consistently across different time frames. However, remember to analyse the fund performance, which matches your investment horizon to get results. Note that the past performance is not indicative of future returns.

Fund History

Choose fund houses that have a strong history of consistent performance in the investment domain. Ensure that they have a consistent track record of at least say five to ten years.

Expense Ratio

It shows how much of your investment goes towards managing the fund. A lower expense ratio translates into a higher take-home return. If there are two funds with a similar asset allocation and returns, then choose the fund which has a lower expense ratio and has the potential to give you superior performance.

Financial Ratios

You can use financial ratios such as standard deviation, Sharpe ratio, alpha, and beta, to analyse a fund. A fund having, higher standard deviation, and beta are riskier than a fund with lower beta and standard deviation. Look for funds with a higher Sharpe ratio, which means it gives higher returns on every additional unit of risk being taken.

Advantages of Debt Funds

The following are some of the most significant advantages of investing in debt funds:

Not influenced much by market movements

The performance of debt mutual funds are not influenced much by the market movements. Hence, these funds are less volatile as compared to equity funds. The portfolio of debt funds is mostly constituted with fixed-income securities.

Stable portfolio

Since the fund invests in fixed-income securities, the returns offered by debt mutual funds are much stabler. Therefore, risk-averse investors should consider investing in these funds.

Best for first-time investors

First-time investors may consider investing in debt funds to get started with their investment journey. This gives them the much-needed glimpse of what mutual funds are capable of.

Best option to park surplus funds

Since debt funds are highly liquid, you can consider investing your surplus money in these funds and earn much higher returns than a regular savings bank account.


Many times, investing in debt funds becomes complex. In case you don’t possess enough financial knowledge and are finding it too difficult to understand, then just reach out to us. We offer handpicked funds from experts.

Frequently Asked Questions

1. Which is the best type of debt fund?

You can make a wise choice by investing in a debt fund that suits your investment horizon, objective, and risk appetite.

2. Are debt mutual funds risk-free?

Although debt funds help you generate steady income, they have certain risks like interest rates and credit risk. Interest risk is associated with a fall in bond prices due to a rise in interest rates. On the other hand, credit risk is when a borrower fails to make the required payments.

3. What are the different types of debt funds?

The different types of debt funds include overnight funds, liquid funds, income funds, gilt funds, dynamic bond funds, ultra short-term funds, fixed maturity plans, etc.

4. Are debt funds tax-free?

The short-term capital gains in debt mutual funds are taxed depending on the applicable tax rate of the investor. On the other hand, long-term capital gains of debt funds are taxed at a 20% rate with indexation.

5. Is FD better than a debt mutual fund?

An FD is more secure as compared to debt funds. It is because market fluctuation does not impact the interest rate.

6. Is a debt mutual fund good for long-term or short-term purposes?

Debt funds are more appropriate for short-term purposes of one to three years. However, some investors may invest in equity funds to achieve their long-term financial goals. Assess your investment objective and make a suitable decision.

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Quick Summary

Debt funds are mutual funds that generate income from bonds and offer varying risk-return profiles. They invest in fixed-income assets and are less volatile. Factors like tax implications, types of debt funds, and associated risks need to be considered. Some key features include liquidity, tax implications, and diversification. Debt funds cater to risk-averse investors and have advantages like stability and liquidity.

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