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.
Here is the list of top short-term debt funds to invest in 2025 based on their 3-year and 1-year annualised returns:
Fund Name |
Category |
3-year Annualised Returns |
1-year Annualised Returns |
Debt |
9.75% |
10.57% |
|
Debt |
8.19% |
9.36% |
|
Debt |
7.78% |
9.53% |
|
Debt |
7.58% |
9.50% |
|
Debt |
7.56% |
8.96% |
|
Debt |
7.54% |
9.31% |
|
Debt |
7.49% |
9.47% |
|
Debt |
7.45% |
9.48% |
|
Debt |
7.44% |
9.54% |
|
Debt |
7.43% |
9.44% |
Note: The above data is as per 11th April, 2025
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.
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.
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.
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.
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.
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.
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.
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.