Best Short-term Debt Funds 2025

Short-term debt funds, also known as short-duration funds, invest in money market instruments, certificates of deposits, and corporate bonds with relatively short maturity periods ranging from 1 to 3 years. Compared to long-duration debt funds, these funds provide steady returns and relatively low risk. This is because their short maturity period minimises their exposure to long-term interest rate fluctuations.

Short-term debt mutual funds are ideal for investors with a short to medium investment horizon and are often considered a better option than fixed deposits or savings accounts, especially in terms of returns and liquidity.

In this blog, we will review some of the best short-term debt funds to invest in 2025. Read on to learn what factors to look out for while making your investment decisions.

List of Best Short-term Debt Funds in 2025

Here is the list of top short-term debt funds to invest in 2025 based on their 3-year and 1-year annualised returns:

Note: The above data is as per 11th April, 2025

Overview of Best Short-Term Debt Funds

• Bank of India Short-Term Income Fund Direct-Growth

• The fund was launched on 31st March, 2008
• Total AUM is ₹11,430.13 Crore
• NAV is ₹28.64 (as of 11th April, 205)
• The minimum SIP amount is ₹1000
• Expense ratio: 0.50% (inclusive of GST)
• Exit load: Nil
• 95% of the funds allocated to debt, 5% held as cash

• ICICI Prudential Short-Term Fund Direct Plan-Growth

• The fund was launched on 12th October, 1993
• Total AUM is ₹8,55,056.27 Crore
• NAV is ₹64.54 (as of 11th April, 2025)
• The minimum SIP amount is ₹1000
• Expense ratio: 0.45% (inclusive of GST)
• Exit load: Nil
• 96.9% of the funds allocated to debt, 3.1% held as cash

• Aditya Birla Sun Life Short-Term Direct Fund Direct-Growth

• The fund was launched on 23rd December, 1994
• Total AUM is ₹3,64,797.32 Crore
• NAV is ₹50.67 (as of 11th April, 2025)
• The minimum SIP amount is ₹1000
• Expense ratio: 0.37% (inclusive of GST)
• Exit load: Nil
• 97.2% of the funds allocated to debt, 2.8% held as cash

• Axis Short Duration Fund Direct-Growth

• The fund was launched on 4th September, 2009
• Total AUM is ₹3,08,294.13 Crore
• NAV is ₹33.15 (as of 11th April, 2025)
• The minimum SIP amount is ₹1000
• Expense ratio: 0.36% (inclusive of GST)
• Exit load: Nil
• 96.6% of the funds allocated to debt, 3.4% held as cash

• UTI Short Duration Direct Growth

• The fund was launched on 14th November, 2002
• Total AUM is ₹3,37,639.69 Crore
• NAV is ₹33.23 (as of 11th April, 2025)
• The minimum SIP amount is ₹500
• Expense ratio: 0.42% (inclusive of GST)
• Exit load: Nil
• 95.9% of the funds allocated to debt, 4.1% held as cash

• HDFC Short-Term Debt Fund Direct Plan-Growth

• The fund was launched on 10th December, 1999
• Total AUM is ₹7,62,037.70 Crore
• NAV is ₹32.51 (as of 11th April, 2025)
• The minimum SIP amount is ₹100
• Expense ratio: 0.40% (inclusive of GST)
• Exit load: Nil
• 95.4% of the funds allocated to debt, 4.6% held as cash

• Nippon India Short-Term Fund Direct-Growth

• The fund was launched on 30th June, 1995
• Total AUM is ₹5,36,165.81 Crore
• NAV is ₹56.38 (as of 11th April, 2025)
• The minimum SIP amount is ₹100
• Expense ratio: 0.37% (inclusive of GST)
• Exit load: Nil
• 94.7% of the funds allocated to debt, 5.3% held as cash

• Mahindra Manulife Short Duration Fund Direct-Growth

• The fund was launched on 4th February, 2016
• Total AUM is ₹4,742 Crore
• NAV is ₹13.07 (as of 11th April, 2025)
• The minimum SIP amount is ₹500
• Expense ratio: 0.28% (inclusive of GST)
• Exit load: Nil
• 94% of the funds allocated to debt, 6% held as cash

• Kotak Bond Short-Term Fund Direct-Growth

• The fund was launched on 5th August, 1994
• Total AUM is ₹4,65,529.48 Crore
• NAV is ₹56.51 (as of 11th April, 2025)
• The minimum SIP amount is ₹100
• Expense ratio: 0.38% (inclusive of GST)
• Exit load: Nil
• 98.3% of the funds allocated to debt, 1.7% held as cash

• Sundaram Short Duration Fund Direct-Growth

• The fund was launched on 26th February, 1996
• Total AUM is ₹62,225 Crore
• NAV is ₹47.14 (as of 11th April, 2025)
• The minimum SIP amount is ₹250
• Expense ratio: 0.31% (inclusive of GST)
• Exit load: Nil
• 93.7% of the funds allocated to debt, 6.3% held as cash

Factors To Consider Before Investing in Short-Term Debt Funds

1) Expense Ratio

The expense ratio is the fee the mutual fund charges on every unit of the scheme. It helps calculate the Net Asset Value (NAV); hence, investors need to look at this number while investing in short-term debt funds.

2) Yield To Maturity

The yield to maturity is calculated by dividing the annualised interest rate by the number of days in a year. This helps investors calculate how much money they will earn from their investments over time.

3) Risk Tolerance

Although short-term debt mutual funds are generally considered to be lower risk than long-term funds and equity funds, they still carry some level of interest rate risk. Therefore, investors should invest in funds according to their risk tolerance, considering potential market fluctuations.

4) Interest Rates

Movements in Interest rates can significantly impact returns. A rise in interest rates can lead to a drop in bond prices, which can impact the performance of short-term debt funds. Therefore, it is important to consider the prevailing interest rate before investing. 

5) Investment Goals And Horizon

It is important to consider your financial goals and investment horizon before investing in a particular fund. The investment goals and horizon can vary based on whether you are saving for education, a house, retirement, or general wealth-building. 

Who Should Invest in Short-Term Debt Funds?

• Short-term debt funds are ideal for investors who are looking for a short-term investment period, generally ranging from 1 to 3 years.
• It is also ideal for first-time investors who want to build their portfolios by investing in short-duration funds with moderate risk and low volatility. 
•  These funds provide a table return and have moderate risk. Therefore, investors can deposit a certain amount in short-duration mutual funds and use a systematic withdrawal plan to earn a regular income from them.
• It can be an alternative savings option for investors other than the regular fixed deposits.

Taxation on Short-Term Debt Funds

You can generate relatively stable returns by investing in debt mutual funds. However, it is essential to understand the tax implications on these funds, especially for short-term holdings, to maximise your post-tax gains.

Capital Gains Tax on Debt Funds

Every profit you earn by redeeming your units in a debt fund is a capital gain; how you will be taxed on this capital gain depends on how long you have held the investment:

Short-Term Capital Gains (STCG):

If you hold the debt fund units for 36 months (3 years) or less, the gains will be categorised as short-term and will be taxed at your income tax slab rate. This means, if you fall under the higher tax bracket, the tax on short-term gains can be potentially high, up to 30% or more, depending on your income.

▶️ Also read, How to Calculate STCG Tax on Debt Funds?

Long-Term Capital Gains (LTCG):

Following the amendments introduced in the Finance Act, 2023, indexation benefits and LTCG have been removed for debt funds that invest less than 35% in equity. Earlier, gains from debt funds held for more than 36 months were taxed at 20% with indexation benefits.

Currently, all capital gains from such debt funds are taxed as short-term capital gains and according to the investor's income tax slab rate. This applies regardless of the holding period. With the introduction of the new tax regime, indexation benefits are no longer available on debt mutual funds that don’t meet the 35% minimum equity exposure requirement.

Conclusion

If you want higher returns than a savings account or fixed deposit without taking on too much risk, short-term debt funds can be a wise option. They provide strong liquidity and are an ideal option for short-term goals (one to three years). However, it is essential to review the fund's expenses, returns, and interest rate trends before making an investment.