Best Debt Funds in India to invest in 2025
Debt Funds invest in government bonds and fixed-income securities issue by the government. The fixed income securities could be treasury bills, corporate bonds, Government securities, and money market instruments
Below are some of the best-performing debt funds in India for 2025:
| Fund Name | Rating | 1Y Returns | 3Y Returns | Fund Size (₹ Crores) |
|---|---|---|---|---|
| Aditya Birla Sun Life Medium Term Plan Direct Growth | 5⭐ | 8.16% | 13.74% | 1888 |
| Baroda BNP Paribas Credit Risk Fund Direct | 5⭐ | 8.48% | 11.05% | 165 |
| UTI Medium to Long Duration Fund Direct-Growth | 5⭐ | 7.85% | 9.78% | 303.35 |
| Nippon India Strategic Debt Fund Direct Growth | 5⭐ | 8.25% | 9.70% | 119.85 |
| Sundaram Low Duration Fund Direct Growth | 5⭐ | 7.36% | 8.12% | 398 |
| Sundaram Short Duration Fund | 5⭐ | 7.09% | 7.26% | 198.96 |
| UTI Short Duration Fund Direct Growth | 5⭐ | 8.08% | 7.54% | 2378.88 |
| Nippon India Ultra Short Duration Fund | 5⭐ | 6.79% | 6.50% | 5319 |
| Aditya Birla Sun Life Dynamic Bond Retail Fund | 5⭐ | 7.74% | 6.55% | 1709 |
| ICICI Prudential All Seasons Bond Fund | 5⭐ | 7.85% | 5.83% | 11698 |
Who can invest in Debt Mutual Funds?
- Risk-averse investors
People who cannot afford the risk of equity and generally want a safer investment option that will give steady returns can opt for Debt Mutual Funds. The market condition does not take its toll on debt funds like equity funds, making it more suitable for risk-averse investors
- Investors looking for greater returns than fixed deposits
People generally invest in banks as they consider it safe and it remains unaffected by market conditions. In case of debt mutual funds, they offer higher returns and are also the least affected funds when it comes to market conditions
- Short or Medium Term investors
Investors who are willing to invest only for a short term can choose this method of investing
- Investors seeking moderate returns
Equity Funds comes with lots of risks, so the returns are high. Returns from Debt Mutual Funds are low compared to equity mutual funds, since they are not impacted by market conditions regularly
Things to keep in mind before investing in Mutual Funds
Taxes – The returns you get from debt mutual fund investments will get taxed. It is essential to be aware of this fact
Tenure – Debt funds come in various forms such as liquid funds and so. The tenure ranges from a few days to a few years. For very short investments, you will have to invest in overnight funds to witness the highest benefits
Advantages of Investing in Debt Mutual Funds
Liquidity: One of the important reasons behind investing in Mutual fund is liquidity. Investors can redeem units anytime they wish after their purchase. The amount you withdraw will reflect in your account within a day
Partial withdrawal: You can withdraw a portion of your investment without impacting the balance amount
Flexibility: You can invest in the way that you prefer, either lump sum or SIP
Stability: Unlike equity, which comes with an air of scepticism, debt funds aren’t affected much by market performance, so you will get guaranteed returns
Tax efficient: Debt Funds are more tax efficient that bank fixed deposits. Debt funds also attract indexation benefits if sold 3 years from the purchase date
Risks involved in Debt Mutual Funds
- Interest Rate Risk:
Debt mutual funds are sensitive to changes in interest rates. When interest rates rise, bond prices fall, leading to a decline in the net asset value (NAV) of debt funds. Conversely, when interest rates fall, bond prices rise, resulting in an increase in NAV. Investors may face losses if they redeem their investments during periods of rising interest rates.
- Credit Risk:
Debt mutual funds invest in a variety of fixed-income securities, including corporate bonds, government securities, and money market instruments. These securities are subject to credit risk, which is the risk of default by the issuer. If a bond issuer fails to meet its debt obligations, it can lead to a decrease in the value of the bond and, consequently, the NAV of the debt fund.
- Liquidity Risk:
Debt mutual funds may face liquidity risk, especially in times of market stress or economic uncertainty. If there is a lack of liquidity in the bond market, it may become challenging for fund managers to buy or sell securities at fair prices. This can impact the fund’s ability to meet redemption requests from investors and may result in NAV fluctuations.
