Best Debt Mutual Funds to Invest in India in 2015
Best Debt Mutual Funds in India

Top 10 Best Debt Mutual Funds in India 2021

Last updated – 28 January 2021

You can invest in Debt mutual if you can’t afford much risk as compared to equities. Since, the debt mutual funds invest money in treasury bills, govt securities, and call money, you can expect a low risk on the investment. These are open-ended in nature that is offered through a fund company that sells directly to the investor.

What are Best Debt Mutual Funds

A debt fund invests in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments. You can consider the Debt mutual funds with high credit rating (you can consider 4 star rating funds to opt), less expense ratio, longer period of inception and funds that are aligned with your investment objective as the best funds.

Things to Consider Before Investing

1. Objective of Investment

Debt funds diversify the portfolio with various types of securities to optimize returns. You can expect predictable performance to some extent. You can invest for a shorter period of time to get better returns than Fixed Deposits. Secondly, if you can’t afford the risk of money loss in market fluctuation, then you can invest in debt funds because they are less prone to market risks as compared to the equity-oriented funds. However, the risk is still there but in less extent.

You can use Debt funds to achieve different goals such as earning additional income on idle money or short term goals like saving for a vacation.

2. Funds Classification

Debt funds have different categories such as liquid funds, income funds, Gilt funds, short-term funds, and ultra short-term funds.

3. Risks

The debt fund value may fluctuate due to the change in the interest rates. The chances that the company might not repay the interest or principal on the committed date. Another risk is lesser liquidity in case the fund manager is not able to sell the underlying security due to a lack of demand.

4. Investment Tenure

An investment time period of three months to one year is ideal for liquid funds. The maximum time horizon shouldn’t be more than three years, however, you can get some funds like Gilt fund with 3 to 5 years maturity.

5. Cost

Debt funds charge an expense ratio for managing your funds borne by you.

How to Evaluate Best Debt Mutual Funds

1. Fund Returns

You should analyze the fund returns in the last  5 or 10 years. Choose funds that have outperformed and matches your investment horizon to get better outcome.

2. Fund History

You can go for a fund house with a strong history of consistent performance. As I said above, fund should have a consistent track record of 5 to 10 years. Such funds give better returns.

3. Expense Ratio

A lower expense ratio means better returns. Choose a fund that has a lower expense ratio along with great performance potential.

4. Financial Ratios

You can use other technical ratios such as standard deviation, Sharpe ratio, alpha, and beta, to analyze a fund. A fund who has a higher standard deviation and beta is considered riskier than a fund with lower beta and standard deviation.

You should choose funds with a higher Sharpe ratio, which means it will give higher returns on every additional unit.

Also read – 11 best long term investment options in India

Top 10 Best Debt Mutual Funds in India 2021

I have curated 10 best debt funds under 5 different categories. Each category is having 2 best performing debt funds. Let’s start with Liquid funds…

1. Liquid Debt Funds

You can in liquid debt funds for a time horizon of a few months because liquid funds come with no lock-in period and maturity can be done in 91 days. These funds can replace keeping surplus money in the savings account. For example, if you are planning to buy a car in few months and have accumulated money for the down payment than instead of keeping money in savings account you can invest in liquid debt funds which give superior returns than a savings account.

You can liquidate these funds anytime and utilize the money.

Fund Name1-year Return3-Year ReturnAsset Under Management
(in crores)
Expense Ratio
Mahindra Liquid Fund6.60%7.00%2,5390.12%
Tata Liquid Fund6.50%6.90%18,4770.20%

2. Ultra Short Term Debt Funds

Ultra short debt funds invest in securities for a period of one month to 3 months. These funds are the replacement of bank fixed deposits. For example, your child marriage is going to happen in a few months then you can put money in ultra-short-term debt funds for better returns than bank FD.

Don’t forget some risk is still there.

Fund Name1-year Return3-Year ReturnAsset Under Management
(in crores)
Expense Ratio
ICICI Prudential Ultra Short Term Fund8.40%7.51%7,1360.94%
Aditya Birla Sun Life Savings Fund8.30%7.62%15,8470.36%

3. Short Term Debt Funds

Short term debt funds are again a good replacement for fixed deposits as these funds invest for the time horizon of 3 months to 12 months. If you are planning for a vacation next year, then you should put money in short term debt funds rather than keeping in bank FD.

Fund Name1-year Return3-Year ReturnAsset Under Management
(in crores)
Expense Ratio
HDFC Short Term Debt Fund10.43%7.94%10,5190.19%
Kotak Bond – Short Term Fund10.88%7.91%10,6020.31%

4. Debt Income Funds

Debt Income funds provide you regular returns on a monthly or quarterly basis instead of capital appreciation. If you have surplus money and would like to get monthly returns as salary then you can invest in debt income funds.

Fund Name1-year Return3-Year ReturnAsset Under Management
(in crores)
Expense Ratio
ICICI Prudential Balanced Advantage Fund10.82%8.72%28,5281.75%
SBI Debt Hybrid Fund9.30%5.10%1,0681.96%

5. Gilt Funds (Medium to Long Term)

Gilt Medium & Long Term debt funds invest thoroughly in Government securities which offer moderate returns with optimum safety.

Fund Name1-year Return3-Year Return10-Year ReturnAsset Under Management
(in crores)
Expense Ratio
ICICI Prudential Constant Maturity Gilt Fund15%8.18%10.40%880.33%
SBI Magnum Gilt Fund14.73%7.07%9.33%19450.95%

Also read – Best SIP mutual funds


Investing in debt mutual funds gives tax edge over bank fixed deposit as debt funds held for 36 months are eligible for indexation benefit and tax on such funds becomes very low.

Further, debts funds are equally liquid to that of bank fixed deposits. So if debt funds can provide better returns with tax benefit and the same liquidity why not go with them instead of following a traditional approach of investing in bank instruments.

8 thoughts on “Top 10 Best Debt Mutual Funds in India 2021”

  1. Hi Amar,

    I am finding a high return fund only for 1 year, which would you suggest? In your analysis, for me it may be short debt fund or any other good suggestion?

  2. One of the best ways to select the best mutual funds is to go for the ones that are at least 5 years old. Spend some time on the internet and go for the ones that come with 4-5 stars only. The asset under management(aum)of such a company should be Rs 1000 crore or more. Also, take into account other factors such as sharpe ratio, expense ratio, alpha, and beta.

  3. Thanks for sharing your analysis,a minor suggestion please do not use image format for the fund name 🙂

  4. ajai kumar srivastava

    Pl. Give details SBI Magnum Gilt fund.please clear how return on investment increases ,when interest rate decreases.What is income tax benefit?

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