Debt funds are low-risk mutual funds which invest most of the money gathered from investors into fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificate of deposit, treasury bills etc.

They are of many types. Certain types of debt funds (short-term fund and ultra-short term fund) are comparable in terms of risk to fixed deposits (FD) while offering returns that are a few points above FD.

Read More: 10 Debt Funds That Gave Better Returns Than FDs

Type of Debt Mutual Funds

Debt funds are not only tax-efficient but can also offer higher returns to investors. We list out 10 different types of debt funds in which you can invest, based on your goals and investment tenure.

Various types of debt fund available in Indian market are

1. Short-Term Funds

If you want to invest for a shorter duration, say for 3 months or more, then these are best debt funds for you to invest in. Short term funds invest in papers like Commercial Paper (CPs) and Certificate of Deposit (CDs).

Top Short Term Fund:

L&T Short Term Income Fund

This is a Short Term Fund type Debt Mutual Fund launched on December 04, 2010. It is debt fund with low risk and has given a return of 8.89 % since its launch. Here are the key features of L&T Short Term Income Fund:

  • This fund has been rated 5-stars by Groww.
  • AUM of close to ₹ 1156 cr.
  • Age is nearly 7 years. So its performance can be easily judged.
  • Past 3 years and 5 years, the return is 8.78 % and 8.92 % per annum respectively.
  • Has consistently outperformed its benchmark Crisil Short-Term Bond since its launch.
  • The top portfolio holdings of the fund include 8 Bharat Aluminium Co. Ltd. Jun 30, 2020, Sprit Textiles Pvt Ltd., CBLO (CCIL), 8.45 Tata Power Renewable Energy Ltd. etc.
  • The holdings are balanced across various sectors with maximum weight given to Financial Services (38.5%).
  • Minimum SIP = ₹1000

2. Ultra Short Term Funds

These funds invest in short-term debt securities with some small portion of long-term securities. The returns in this category are similar to the returns offered by short-term funds.

Top Ultra-Short Term Fund:

Franklin India Low Duration Fund

This is an Ultra Short Term Fund type Debt Mutual Fund launched on July 26, 2010. It is a fund with very low risk and has given a return of 9.38% since its launch. Here are the key features of Franklin India Low Duration Fund.

  • This fund has been rated as a 5-star fund by Groww.
  • AUM of close to ₹5586 cr.
  • Age is nearly 7 years. So its performance can be easily judged.
  • Past 3 years and 5 years, the return is 9.11% and 9.44% per annum respectively.
  • Has consistently outperformed its benchmark Crisil Short-Term Bond since its launch.
  • The top portfolio holdings of the fund include 9.2 DLF Home Developers Ltd. Nov 21, 2019, Renew Power Ventures Pvt. Ltd., 12.25 DLF Ltd. Aug 10, 2018, 8.4 Edelweiss Commodities Services Ltd etc.
  • The holdings are balanced across various sectors with maximum weight given to Financial Services ( 48.1% ).
  • Minimum SIP = ₹500

3. Liquid Funds

As the name suggests, these are the debt funds which can be easily converted in to cash that too within a working day or two. Liquid funds invest in highly liquid money market securities like Commercial Paper (CPs), Treasury Bills and Certificate of Deposit (CDs).

They invest in instruments with a maturity period of up to 91 days. Among all debt funds, liquid funds provide most stable returns. Liquid funds are best suited for investors having surplus amount lying idle in the savings bank account.

Top Liquid Fund:

PRINCIPAL Cash Management Fund

This is a Liquid Fund launched on August 30, 2004. It is a debt fund with extremely low risk and has given a return of 7.58% since its launch. Here are the key features of PRINCIPAL Cash Management Fund :

  • This fund has been rated as a 5-star fund by Groww.
  • AUM of close to ₹1271 Cr.
  • Age is nearly 13 years.
  • Past 3 years and 5 years, the return is 7.5% and 8.14% per annum respectively
  • Has consistently outperformed its benchmark Crisil Liquid since its launch.
  • The top portfolio holdings of the fund include  Treasury Bill (91D), HDFC Bank, DCB, CBLO (CCIL), IL&FS Financial Services Ltd. (90D), Indostar Capital Finance Pvt Ltd (76D), Export-Import Bank of India Ltd. (313D) etc.
  • The holdings are balanced across various sectors with maximum weight given to Financial Services ( 55.8% ).
  • Minimum SIP = ₹2000

4. Income Funds

In income funds, investors invest their money in debt instruments like corporate debentures and government securities. Income funds are for investors with a high-risk appetite It works well for long-term investments since there is a high risk of change in interest rates.

So, invest in income funds if you want to gain from the change of interest rates over a longer period of time.

Top Income Fund:

Axis Income Fund

This is an Income debt mutual fund launched on March 30, 2012. It is a debt fund with moderately low risk and has given a return of 10.29% since its launch. Here are the key features of Axis Income Fund.

  • This fund has been rated as a 4-star fund by Groww.
  • AUM of close to ₹425 cr.
  • Age is nearly 6 years.  So its performance can be easily judged.
  • Past 3 years and 5 years, the return is 8.03% and 8.82% per annum respectively.
  • Has consistently outperformed its benchmark Crisil Composite Bond since its launch.
  • The top portfolio holdings of the fund include 7.55 TI Financial Holdings Ltd. Feb 20, 2020, Net Receivables/(Payable), 8.32 Reliance Jio Infocomm Ltd. Jul 8, 2021, 9.2 ICICI Bank Ltd., 7.99 Tata Power Co. Ltd. Nov 16 2020 etc.
  • The holdings are balanced across various sectors with maximum weight given to Financial Services (46.3%).
  • Minimum SIP = ₹1000

5. Monthly Income Plans ( MIPs )

MIPs is the mixture of equities (around 10-15%) and fixed income securities. MIPs are suitable for investors with a big lump sum amount and want a monthly income on their investment.

Top MIP Fund

ICICI Prudential MIP 25

This is a Monthly Income Plans (MIPs) launched on March 30, 2004. It is a debt fund with moderately low risk and has given a return of 10.29% since its launch. Here are the key features of ICICI Prudential MIP 25.

  • This fund has been rated as a 5-star fund by Groww.
  • AUM of close to ₹1460 Cr.
  • Age is nearly 14 years. So its performance can be easily judged.
  • Past 3 years and 5 years, eturn is 8.8 % and 11.46 % per annum respectively.
  • Has consistently outperformed its benchmark Crisil MIP Blended since its launch.
  • The top portfolio holdings of the fund include 7.61 GOI May 9, 2030, 7.95 Vedanta Ltd. Apr 22 2020, CBLO (CCIL), 7.6 ICICI Bank Ltd. Oct 7 2023, 2 Tata Steel Ltd. Apr 23 2022 etc.
  • The holdings are balanced across various sectors with maximum weightage given to Sovereign (54.4%).
  • Minimum SIP = ₹1000
  • Equity share = 25.1%

6. Fixed Maturity Plans

These funds have fixed maturity period, investing in papers with matching maturity. They take away the risk of change in interest rates by holding it till maturity. So, the NAV of the fund is not affected even if interest rates up or down.

FMP is the answer for those looking to park their money for a fixed tenure during uncertain interest rate movements.

Top FMP Fund

DHFL Pramerica Short Maturity Fund

This is a  Fixed Maturity Plan fund launched in January 21, 2003. It is a fund with low risk and has given a return of 7.91% since its launch. Here are the key features of DHFL Pramerica Short Maturity Fund.

  • This fund has been rated as a 4 star fund by Groww.
  • AUM of close to ₹1696 Cr.
  • Age is nearly 14 years. So its performance can be easily judged.
  • Past 3 years and 5 years, the return is 8.17% and 8.64% per annum respectively.
  • Has consistently outperformed its benchmark Crisil Short Term Bond since its launch.
  • The top portfolio holdings of the fund include 8.36 Power Finance Corporation Ltd., 8.46 Housing Development Finance Corporation, 9.5 Business Broadcast News Holding Ltd. etc.
  • The holdings are balanced across various sectors with maximum weightage given to Financial Services ( 62.4% ).
  • Minimum SIP = ₹500

7. Dynamic Mutual Funds

Dynamic funds switch aggressively between short term and long term debt funds. These funds invest across all classes of debt and money market instruments with no cap on maturity, or investment type. Returns are taxed as per your income tax slab if sold before three years and post that long-term capital gains tax applies.

Top Dynamic Mutual Fund

ICICI Prudential Long Term Plan 

This is a Dynamic bond launched on January 20, 2010. It is a debt fund with moderately low risk and has given a return of 9.78% since its launch. Here are the key features of ICICI Prudential Long Term Plan.

  • This fund has been rated a 5-star fund by Groww.
  • AUM of close to ₹3674 Cr.
  • Age is nearly 8 years. So its performance can be easily judged.
  • Past 3 years and 5 years, the return is 8.23% and 11% per annum respectively
  • Has consistently outperformed its benchmark BSE S&P 100 and NIFTY 50 since its launch.
  • The top portfolio holdings of the fund include 7.17 GOI Jan 8, 2028, 7.88 GOI Mar 19, 2030, CBLO (CCIL), Yes Bank Ltd. , 7.88 GOI Mar 19, 2030, etc.
  • The holdings are balanced across various sectors with maximum weight given to Financial Services (42.3%) followed by Sovereign (37.9%).
  • Minimum SIP = ₹1000

8. Credit Opportunities

These are similar to dynamic funds as these invest in debt ranging from short term to long term with an objective to generate high-interest income. These funds are suitable for investors who are willing to take a risk for higher returns.

Top Credit Opportunities Fund

Franklin India Dynamic Accrual Fund 

This is a Credit Opportunities debt Mutual Fund and one of the oldest debt fund launched on March 5, 1997. It is a debt fund with low risk and has given a return of 8.97% since its launch. Here are the key features of Franklin India Dynamic Accrual Fund.

  • This fund has been rated as a 5-star fund by Groww.
  • AUM of close to ₹3008 cr.
  • Age is nearly 20 years. So its performance can be easily judged.
  • Past 3 years and 5 years, the return is 9.26% and 9.06% per annum respectively.
  • Has consistently outperformed its benchmark Crisil Composite Bond since its launch.
  • The top portfolio holdings of the fund include Pune Solapur Expressway Pvt Ltd., Dolvi Minerals And Metals Ltd., 9.5, Yes Bank Ltd., Essel Infraprojects Ltd., Aditya Birla Retail Ltd. etc.
  • The holdings are balanced across various sectors with maximum weight given to Financial Services (27.3%).
  • Minimum SIP = ₹500

9. Debt-oriented hybrid funds

As the name suggests, invest mostly in debt and a small part of the corpus in equity. The equity part of the portfolio would provide extra returns, but the exposure also makes them a little risky.

Top Debt-oriented Hybrid Fund

UTI Charitable and Religious Trusts 

This is a debt-oriented hybrid fund and one of the oldest debt funds launched on October 1, 1981. It is a debt fund with moderately low risk and has given a return of 3.76% since its launch. Here are the key features of UTI Charitable and Religious Trusts.

  • This fund has been rated as a 4-star fund by Groww.
  • AUM of close to ₹ 726 cr.
  • Age is nearly 36 years. So its performance can be easily judged.
  • Past 3 years and 5 years, the return is 8.13% and 11.02% per annum respectively.
  • Has consistently outperformed its benchmark CRISIL Short Term Debt Hybrid 75+25 Fund since its launch.
  • The top portfolio holdings of the fund include 6.79 GOI May 15, 2027, 7.85 Indian Hotels Co. Ltd. Apr 15, 2022, 8.85 HDFC Bank Ltd, 8.13 Piramal Enterprises Ltd Jun 20 2019 etc.
  • The holdings are balanced across various sectors with maximum weight given to Financial Services (25.7%).
  • Minimum SIP = ₹ 1000
  • Equity share = 26.7%

10. Gilt Funds

In gilt funds, investors invest their money in securities issued by both central and state government. There no risk associated with gilt funds as these are backed by the government. However, these not completely risk-free and are vulnerable to change in interest rates.

In fact, for long-term investing, they are the riskiest of all other debt funds available in the market due to their sensitivity to change in interest rates.

Top Debt-oriented Hybrid Fund

SBI Magnum Gilt Fund Long Term

This is a Gilt fund launched on December 30, 2000. It is a debt fund with moderately low risk and has given a return of 8.06% since its launch. Here are the key features of SBI Magnum Gilt Fund Long Term :

  • This fund has been rated as a 5-star fund by Groww.
  • AUM of close to ₹3120 Cr.
  • Age is nearly 17 years.  So its performance can be easily judged.
  • Past 3 years and 5 years, the return is 8.04% and 9.92% per annum respectively
  • Has consistently outperformed its benchmark I-SEC Li-BEX since its launch.
  • The top portfolio holdings of the fund include 6.68 GOI Sep 17, 2031, CBLO (CCIL), 6.79 GOI May 15, 2027, 7.67 Tamil Nadu Uday Bond Mar 22, 2023, 7.35 GOI Jun 22, 2024, 7.16 GOI May 20, 2023, 6.84 GOI Dec 19, 2022, etc.
  • The holdings are balanced across various sectors with maximum weight given to Sovereign (80.9%).
  • Minimum SIP = ₹ 500

Please remember, don’t invest in debt funds without doing your homework. Performance, track record along with scheme-specific attributes, portfolio credit quality, fund manager track record and expense ratios really do matter for investing in debt mutual funds.

To look at some of the best performing funds from every category of mutual funds, check out Groww 30 best mutual funds to invest in 2018.

Happy Investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.