Best Debt Mutual Funds in India – Details & Comparison

Debt Mutual Funds offer several benefits. But most of the small and retail investors know little about them and prefer to invest in Fixed Deposits or Recurring Deposits.

Debt Funds can give better returns than your Savings Bank Account & Bank deposits. Safety of capital is almost the same with both the options (Debt MFs & FDs). FDs may offer you assured returns but Debt funds can offer you higher post-tax returns. (You may like reading – ‘Are Bank Fixed Deposits really safe?)

If you have any financial goal(s) which is less than 5 years away, which can be met with 8% to 10%, rate of return (or) when you are not comfortable with high volatility (risk) then you can surely consider investing in Debt Mutual Funds.

The returns from Debt funds are mainly dependent on the ‘interest rate’ scenario that is prevailing in the economy. If interest rates are in downward trend, most of the long-term or dynamic debt mutual funds can give better returns than bank fixed deposits. RBI may not be done with ‘Interest Rate Cuts‘. We may see further rate cuts in the future based on the Inflation and Macro-economic data.

Some of the debt mutual funds especially Dynamic bond funds, Gilt funds and Long-term debt funds have given better returns than bank Fixed Deposits over the last 1 to 2 year period.

In this post, let us look at some of the top performing and best Debt Mutual Funds that you can consider for your short or medium term goals.

For details on different types of Debt mutual funds, their benefits and when to invest in debt funds, you may kindly read – ‘Debt Funds – Types, Benefits & Risk Vs Return’.


Methodology to shortlist Top rated Debt Mutual Funds

I have judiciously followed the below points to select the best Debt mutual funds;

  • Funds are shortlisted based on the past performances (Returns).
  • Selection among the top rated 5 to 6 AMCs with a proven track record in Debt Funds segment.
  • Age of the funds.
  • Quantum of AUM (Assets Under Management)
  • Expense Ratio (What is Expense ratio? Expense ratio shows the amount that mutual funds charge for managing the investors’ money)
  • Exit Load.
  • Risk – Reward profile.
  • Various Risk / volatility related Ratios.
  • Based on the data available on CRISIL, Morningstar, Moneycontrol & Valueresearchonline portals.
  • The current investment portfolios of the funds.
  • The credit quality, interest rate sensitivity, modified duration & average maturity of the Funds’ portfolios have been given due importance. (If you are investing for short-term, ideally you have to pick funds which have limited/low sensitivity to interest rates. At the same time, if you are investing for medium to long-term duration, you may pick funds which have moderate to extensive sensitivity to interest rates. Funds which have high credit quality w.r.t their portfolios should be given high importance.)
  • I have tried to identify top performing Debt mutual funds based on the Fund Categories like Liquid Debt Funds, Short-Term Debt Funds, Dynamic Bond Funds, Gilt Funds, Monthly Income Plans etc.,

Top & Best Debt Mutual Funds in India for 2017

Below are some of the top performing and highly rated category-wise debt mutual funds;

Best Liquid Debt Funds 


Liquid funds invest in highly liquid money market instruments that provide easy liquidity. The period of investment in these funds could be as short as a dayAxis Liquid fund, HDFC Liquid Fund and Birla Sunlife Cash Plus funds are some of the top performing Liquid funds. The average liquid fund category returns in the last 3 months & 1 year are, 1.5% and 6.8% respectively. Franklin India’s Treasury Management Fund & ICICI Pru Liquid plan can also be considered for very short-term goals. Liquid funds are also best suited for saving a portion of your Emergency Fund.

If you want to park your surplus cash for very short-periods say 1 to 3 months, opt for these funds. Do not invest in Liquid Funds for a longer period as these offer low single-digit returns at best. Do note that these funds may or may not outperform your savings bank Account interest rate. (I had shortlisted same funds last year too.)

Best Ultra-Short Term Debt Mutual Funds


The Ultra Short-term debt funds are also known as Liquid plus funds or Cash / Treasury Management Funds. They generally invest in very short term debt securities with a small portion in longer term debt securities.

I had picked DWS Ultra Short Term Fund, Franklin Ultra Short Bond Fund & Axis Banking Debt Fund last year. This year, I am replacing the DWS & Franklin funds with L&T Ultra Short Term Fund & IDFC Banking Fund. The above funds’ portfolios are of very high credit quality and have low sensitivity to interest rates.

The average category returns generated in the last 3 months and 1 year are; 2% & 7.9% respectively. If you have surplus money which needs to be invested for say 3 to 12 months, you can consider investing in these funds.

Best Short-Term Debt MFs


Funds investing in slightly longer duration debt securities than Ultra short term funds are referred to as Short term funds. These funds are also referred to as Short-Term Credit Opportunities funds.

I had short-listed Birla Sunlife Short-term fund and HDFC Short Term fund last year. This year, I am replacing the HDFC Short Term Fund with Axis Short term fund and also including Franklin Low Duration Fund & L&T Short Term opportunities Fund. The above funds’ portfolios are of very high credit quality and have low sensitivity to interest rates. (HDFC Short Term Fund’s portfolio has been rated as ‘medium’ in terms of credit quality.)

The average fund category returns over the last 1 and 3 years are; 8.8% & 7.9% respectively. If you have surplus money which needs to be invested for say 6 to 18 months, you can consider investing in these funds.

Top & Best Dynamic Debt Funds


They invest a major portion in various debt instruments such as bonds, corporate debentures, government securities and money market instruments of various maturities and issuers. Dynamic Bond Funds invest in debt securities of different maturity profiles. These funds are actively managed and the portfolio varies dynamically according to the interest rate view of the fund managers.

During last year’s review on Debt Funds, I had selected TATA Dynamic bond & HDFC High Interest Fund under Dynamic Bond Funds category. I am continuing with the same funds and have also included Birla Sun life Dynamic Bond Fund & ICICI Pru Dynamic Bond Fund to the tracking list.

The average returns generated by the funds which are in Dynamic & Long-term income bond funds category during last 1 and 3 years are; 9.2% & 8.8% respectively.

These funds are suitable for investors who are willing to take a relatively higher risk and have longer investment horizon (say 1 to 5 years). Invest in a Dynamic Income fund if you want to gain from both rising and falling interest rate scenarios. But, dynamic funds can have high interest rate risk associated with it.

Best Gilt Funds


Gilt Funds invest in government securities of medium and long term maturities issued by central and state governments.

During last year’s review on Debt Funds, I had selected SBI Magnum Gilt Fund, IDFC’s G-Sec Fund and & L&T Gilt funds under Gilt Funds-Intermediate to Long-Term category. I am continuing with SBI and L&T Funds, but replacing IDFC fund with HDFC Gilt Fund – Long Term plan.

The average category returns for the last 1, 3 and 5 year are; 10.08%, 9.4% and 7.8% respectively. You can consider Gilt funds in a falling interest rate scenario.

Best Monthly Income Plans / Hybrid – Debt Oriented Plans

These funds invest in a mix of Debt and Equity in the proportions of say 80:20 or 70:30 or other proportions of similar kind. The objective of these funds is to provide enhanced regular returns to risk-averse investors by taking small positions in equity assets.

For complete details on Monthly Income Plans, kindly read – “Top & Best Monthly Income Plans “.

For more details on Child Mutual Fund – Debt oriented plans, kindly read – “Children’s Gift Funds – Review“.

In most of the scenarios, investing in best debt mutual funds can be more beneficial than bank deposits, tax-free bonds and certain other fixed income securities. If you are in 20-30 per cent tax bracket, tax-efficient debt funds can be more beneficial to you than FDs. Also, if you have lump sum money to be invested in an Equity oriented Fund, you can opt for STP (Systematic Transfer Plan) from a Liquid Debt fund to an Equity fund of your choice (within same AMC).

Do you prefer to have debt mutual funds in your investment portfolio? Do you prefer investing in debt funds to bank fixed deposits? Kindly share your views.

(Image courtesy of Stuart Miles at (Annualized returns are for Debt Funds – Regular Plans & Growth option as on 26-Oct-2016.)

  • Saurabh says:

    Hi Sreekanth,
    How are you doing?
    Need one suggestion. I had invested 4lakh lumsump amount in HDFC Gilt fund-Long Term plan in Nov2016 as it was performing good at that time. But now its in loss of around 5k.
    1.Shall I keep this fund or redeem it with losses?
    2. Or will it be beneficial to start a STP from this fund to some equity fund?

    What kind of tax I need to pay in case of redemption and STP?


    • Dear saurabh,
      I am doing good, thank you! How about you?
      The current and expected interest rate scenario may not augur that well for Gilt funds.
      May I know your investment objective (now) and time-frame??

      • Saurabh says:

        I am fine Sreekanth.
        Well I do no need this money now so its a long term investment for me.

        • Dear Saurabh,
          I am assuming that you meant you dont need this money as of now.
          If your time-frame is say around 5+ years, you may STP to an equity balanced fund. Ex : HDFC Hybrid Equity fund (earlier known as HDFC Balanced Fund).
          Kindly read : Why your Best Mutual Fund Schemes may not remain as ‘the best’? | Categorization & Rationalization of MFs

          • Saurabh says:

            Thanks for you suggestion.
            Seems I was in too much hurry while writing my previous comments…lol.. Yes I mean to say I do not need this money as of now and time frame is 5+ years.
            Well I already have SIP in HDFC balanced fund. How about starting STP on any large cap fund e.g. HDFC growth fund?

          • Sreekanth Reddy says:

            Dear Saurabh,
            If you would like to pick a large-cap fund then you may consider funds like Franklin Bluechip or Birla Frontline Equity fund.

          • sautabh says:

            Yes but if I am not wrong in case of STP I will have to select the same fund house. And in my case it would be HDFC only.

            If I redeem the amount and invest the whole 4 lakhs in some income fund then probably I can think of starting STP in Franklin or Birla large cap funds (depending upon which fund house I invest my money in for income fund) .

            Let me know if I am on correct path or not.

          • Sreekanth Reddy says:

            Dear saurabh,
            Yes, for STP, the two funds have to be from the same Fund house.
            If you are sure to set up an STP, suggest you to pick a Liquid fund and then to a Large cap fund. Do watch out for tax implications as STPs are treated as normal redemptions.

            Kindly read : Mutual Funds Capital Gains Taxation Rules FY 2018-19 (AY 2019-20) | Capital Gains Tax Rates Chart

          • sautabh says:

            Thanks Sreekanth for you suggestions.Salute to your efforts.

          • Saurabh says:

            Hey Sreekanth,
            1) I hv redeemed all units of my HDFC gilt fund and invested in ABSL money manager fund direct plan. Now I want to setup STP on ABSL Focused Equity Fund – Direct Plan (G).I hv never setup an STP so need ur valulable suggestion.

            Amount invested in money manager fund is Rs 4,40,000
            a. How much amt of STP should I set(monthly)?
            b. How much time period(in years) should be good?
            c.Is Large cap ABSL Focused Equity Fund – Direct Plan (G) good to invest or should go for any Multicap or small cap fund? (Investment horizon is 5+ years)

            2)Also I am looking ur suggestion on one more investement.Recently HDFC balanced fund has been merged with HDFC hybrid equity Fund.IS it good to stay invested with HDFC hybrid fund? Time horizon is 10+ years.

          • Sreekanth Reddy says:

            Dear Saurabh,
            1) a & b) There is no right or wrong answer.. You may set up say Rs 35k pm for next 12 months. If your investment horizon is around 5 years, a large cap or balanced fund is fine.
            2) You may continue with your investments in HDFC Hybrid equity fund.

          • Saurabh says:

            Thanks Sreekanth. This is helpful to make a decision.

  • Prem says:

    Hi Sreekanth,
    I would like to invest for debit fund for 3 year minimum (5 year max) due to STCG rule. Which category looks promising at the moment. I can take moderate risk. I am not interested in liquid and ultra short term fund (because I don’t want to hold them for 3 years)
    Short term, Gilt, Dynamic or MIP?

    many thanks

  • Sanjay says:


    I have surplus funds ( around 15 lacs) that I want to park for 1.5-2 years max. What would be a good option to invest? Arbitrage fund will be good? As they are like equity funds in taxation ( No LTCG post 1 year)


  • Amlan says:

    Hi SreeKanth,

    Thanks for your help as always.

    I have 10 lakhs in my bank account. I have bought a house recently for which I have to pay remaining amount to builder on next 7-8 Months. So could you please suggest me some ultra short term debt fund or short term debt fund .

    Thanks in advance.
    p.s : This the extra amount after taking loan and I have kept it for registration and rest amount to be paid in jan or feb 2018.

  • Phani Nadella says:

    Hello Sreekanth,

    Greetings !!!

    the way u have been guiding all is really appreciable. I too have a couple of queries.

    1) Which is the best scheme to invest to get huge returns after 15-20 years?
    2) Which is the best scheme to invest to get better returns after 5-6 years?
    3) Is it suggestible to enter into equity market for this?
    4) What is your opinion on “” ?

    Phani Nadella

  • KSam says:

    Dear Sree,

    Hope you are well. Requesting your expert advise to invest 2,00,000 in Debt Funds as looking for investing them for 1-2 years.

    Please suggest 2 funds Short term or Ultra short term in which I can invest 1,00,000 each. Also, is it wise to make this investment in the current market condition.

    Thanks as always.

    • Dear KSam,
      You may consider Short term Income opportunities funds.
      You may consider Franklin low duration fund or Axis short term fund.
      Kindly do note that even debt funds are associated with risks and returns are not guaranteed.

      • Phani Nadella says:

        Hello Sree,

        How come Debt funds are associated with risks? Its the investment in Govt. bonds and securities, right?
        thats the reason, they are treated as guaranteed returns.
        Please brief me out with this query.

        Looking forward.
        Phani Praveen Nadella

        • Dear Phani,
          Returns from Debt funds are not guaranteed.
          A debt fund can invest in mix of fixed income oriented securities, but there are certain risks on these also, like Default risk, credit risk, interest rate risk, etc.,
          For example : If a debt fund invests in Bonds (heavily) offered by a Pvt ltd company and if that company defaults, it can have an impact on fund’s performance.
          If you have noticed recent performance of some of the debt funds (including Liquid funds), have taken a beating…
          Kindly read this article..FYI..

  • Albert says:

    i am having a lumpsum amount of money,which can be invested for 2 to 3 years ..which funds should i go for ?

  • Rajesh singh says:

    Hi Srikanth,

    Thank you as always for your wonderful articles.

    I saw some news regarding debt funds and I’m so confused by that.

    Could you please explain, is it true? If true then what could happen? And what is your take?

    Here is the link:


    • Dear Rajesh,
      Let’s first understand the fact that even Debt funds are prone to various market risks.
      The article talks about risks on both Debt as well as Equity funds.
      Hence, if one is investing for short term, advisable not to chase for returns aggressively and can keep things as simple as possible.

      • Rajesh singh says:

        Thanks Srikanth,

        Actually I have created my fixed income portion of my portfolio in liquid and short term funds with short to long term view. Ex. 1-10 years..
        Please suggest should I continue to invest in these or any other options you would suggest.
        Current funds are:

        1) Birla sun Life short term fund
        2) ICICI Pru banking & psu debt fund
        3) ICICI Pru liquid fund


  • Ram says:

    I have around 20 lakhs savings in bank account. I am looking for investment options gives interest better than FD. I already have PPF account, and I am not interested in real estate. I am thinking to find good Debt based funds to expect at least 10% return. Or somebody suggesting Govt Bonds, not sure how to approach.

    And my investment horizon is 10 years.

  • Nishanth says:

    Dear Shreekanth,
    I hv an investment in Birla Sun Life Dynamic Bond Fund – Regular Plan – Dividend (Dividend reinvestment plan) NAV 11.76, Amount-5lakhs approx. Couple of days ago it fell 6% in a day ,what do I do ,shud I book loss & go to another better debt or balanced fund scheme… if so plz suggest which one.

    • Dear Nishanth,
      May I know your investment horizon?

      • Nishanth says:

        About 2 to 3 yrs.

        • Dear Nishanth,
          All types of mutual funds (Equity / Debt / Hybrid) are subject to risks.
          Also, the debt funds may not give the kind of returns they had given in the last couple of years. So, let’s have slightly realistic expectations.
          For 2 to 3 year horizon, definite NO to Equity balanced funds.
          Ideally dynamic funds can be for little longer period. Continue with dynamic fund if you are ready to accept the risks.

  • Yavika says:

    hi Sreekanth,
    hru? I was checking the returns of liquid and UST debt funds. the returns for the period of 3 months is only around 1.7%. should I park the lumpsum amount in liquid fund for 3 months timeframe? Is it not wise to keep it in saving bank a/c only with sweep-in facility. Even after tax, it’s return more than the return of liquid funds!


    • Dear Yavika,
      Personally, for very short period horizon, I do not like to chase returns. Safety of capital can be given high priority 🙂
      Savings bank account interest rate is generally 4% per annum, so in most of the cases liquid funds can give better returns than bank savings a/c rate.

      • Yavika says:

        ok..thank you. Even I was thinking of the same. as i said earlier, I have around 25lakhs surplus which I want to invest in Equity MFs over a period of 3months. Till then, I was wondering if I need to put in Liquid or Ultra short term debt fund.
        I think I will keep in bank account only. and invest in MFs as early as possible.

  • Monika says:

    Hello sir,

    My mother wants to invest in MFs as the FD rates are coming down. Which of the fund type will you suggest? She is a very risk averse person and is looking for a 5 yr period. Basic objective is wealth generation and getting better returns than FD.. She can invest a lumpsum amount, but will it be better to get an MIP type FD and invest the interest in an SIP, to safeguard the principal?

  • Jamir meer says:

    Hi Sreekant ,
    I am new to Mutual fund and i want to invest Rs 3000 per month and want to invest in ultra short term debt fund ,which fund is suitable kindly advice me.

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