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Debt Mutual Funds: Top 5 Debt Oriented Mutual Funds in India

30 August 2021
Debt Oriented Mutual Funds in India

In today's market, Debt mutual funds are the best investment for a risk-averse investor. By investing in debt funds, investors can diversify their portfolios while minimizing risks. After all, most investments are made for a rainy day, and there are no better investments for an emergency than Debt funds. In this article, we will tell you all about the five best debt mutual funds in India.

What are Debt Mutual Funds?

Debt funds are a type of mutual funds that are mainly invested in debt securities. Debt investments are also called fixed-income investments because of the stable and regular returns. The debt instruments that generally attract the interest of the Debt mutual fund managers are treasury bills, government bonds, commercial papers, certificates of deposit, non-convertible debentures, corporate bonds, et cetera.

But have you ever wondered, "Why are they called "Debt Based Mutual Funds"? Well, the answer is pretty simple. You see, the debt instruments that we just mentioned above are simply loans taken by the government or companies in return for these securities, which portray the amount of debt and rate of interest for the loan.

So basically, a debt fund lends your money to the government and other corporate firms in return for a certain amount of previously decided interest.

The question that comes to the mind of a logical investor is that if the interest rate is previously determined and the investment is basically a loan, then why do the interest rates differ, and how does risk come into the picture?

There's an answer to that too. The risks and returns on debt instruments are determined based on the period of maturity and the creditworthiness of the entity issuing the securities. Hence, private entities issuing securities like corporate bonds represent higher returns for higher risks, whereas government securities provide low returns and low to zero risks.

The distinction within the debt mutual fund lies in the type of debt securities they invest in one and the duration and the duration for which they hold the investment.

Understanding various types of debt mutual funds will help you gauge the right fit for your portfolio on the basis of your risk profile and investment goals.

5 Best Debt Mutual Funds To Invest In This Year

5 Best Debt Mutual Funds To Invest

Features of Debt Funds

Features of Debt Funds

Invested in Debt Securities

Debt mutual funds are majorly invested in low-risk debt securities such as government bonds, treasury bills, corporate bonds, et cetera.

Low Risk and Stability

Debt MFs generally have low risks and are relatively stable compared to other mutual funds in the market. The volatility of debt funds is determined by the interest rate fluctuations in the money market. These fluctuations are not as extreme as those in equity, making debt funds a safer and stable investment.

Low and steady capital appreciation

Due to the low risk, debt funds also provide lower returns in comparison to other funds. This is because the returns on debt funds are pre-determined, which is why the risks are low, and so are the returns. However, the steady returns are beneficial to risk-averse investors looking for security and steady returns in their investments.


Most debt mutual funds are highly liquid, making them an ideal investment if an investor is looking to save funds for emergencies. In addition, debt funds are highly stable and allow the investors to pull out their money whenever they feel the need to.

Types of Debt Based Funds

Overnight Funds

The funds that are invested in securities with a maturity period of 1 day, such as CBLO's and overnight reverse repos, are called overnight funds. The fact that the funds are invested for such a short period minimizes the interest rate risks and makes them the safest of all the debt funds.

Ultra-Short Term Debt Funds

These are the funds that are invested in debt securities with a maturity of 91 days or less. These funds are highly liquid and suitable for stable, low-risk returns in both the short term and long term. The short period of maturity protects the investments from interest rate risks and inflation risks. They are one of the best debt funds to invest in for liquidity and emergencies.

Money Market Funds

The money market funds are invested in debt-based securities that have a maturity period of up to 1 year. This is a preferred investment for the ones who are investing for the very short term and are looking for alternatives to FDs.

Types of Debt Funds

Liquid Funds

Liquid funds are specially made to provide investors with liquidity. These funds do not have any exit loads and are highly liquid. They are invested in very low-risk debt securities and are suitable savings for emergencies.

Corporate Bond funds

These are the funds invested in various corporate bonds based on the credit ratings and returns of the organizations. These securities provide good interest rates due to the credit risks involved.

Gilt Funds

Gilt funds are invested in government securities that usually have a maturity period of 3 to 5 years. The interest rates in these securities are lower than that of corporate bonds due to the low credit risk.

Floater Funds

These are the funds that are invested in floating-rate securities. These bonds have floating interest rates that are adjusted as per the market conditions. However, these funds try to mitigate the risks of the floating market by investing some of the funds in low-risk government securities.

Credit Risk Funds

Credit risk funds are mutual funds that have more than 65% of the capital invested in bonds that are AA rated and lower. These bonds have high credit risk and hence high returns to compensate for the risk of default. These funds are generally short-term and are considered the riskiest funds in Debt based mutual funds.

Who should invest in Debt Mutual Funds?

Debt mutual funds are suitable for risk-averse investors who would like to invest their funds for the short and medium term. Though one can choose to invest in debt oriented mutual funds for the long term as well, they are usually suggested for short and medium-term investments because of the low risks and the availability of short term funds such as overnight funds and money market funds that have a maturity period of 1 day and 1 year respectively.

Debt funds carry a very low-risk, low-return approach towards investment and provide steady and stable returns. MIPs are suitable for senior citizens and retired investors who are looking for a steady, low-risk, fixed income. Liquid funds are for investors who would like to gain stable returns and save funds for emergencies. They do not have any exit loads and provide 4-5% returns. Debt funds offer several investment options based on the goals and risk appetite of the investors.

How to Evaluate Debt Based Mutual Funds?

Debt Based Mutual Funds

Past returns

When you are looking for debt funds for good returns, it is always a good idea to search for the funds that have been providing the kind of returns you desire in the past years. Choosing the funds with the best returns would always be beneficial to grow and sustain your wealth.

Asset Allocation

Asset allocation is one of the most important things that you need to keep in mind while investing in a debt fund. Debt-based mutual funds are invested into several debt securities that vary in risks and returns, not to mention the small percentage invested in equity as well. While selecting a debt oriented mutual fund to invest in, one should understand the risks and returns of the debt securities that are a part of the fund and also the stocks that the fund invests in.

Investment Horizon

Many debt based mutual funds suitable for different investment horizons are available in the market. What you need to keep in mind while investing in a debt oriented mutual fund is whether it meets your investment horizon or not? Short-duration debt funds are suitable if you don't want to invest for more than three years, medium-term debt funds are suitable if you are willing to invest for 3-5 years, and so on.

Your Financial Goals

The best debt mutual funds are the ones that align with your portfolio and help you achieve your financial goals. For example, you can choose liquid funds if you are investing for emergencies or MIPs if you are looking to obtain a regular source of income, et cetera.

The Fund Manager

While evaluating a debt based mutual fund, it is necessary to also evaluate the past performance of its fund manager. A fund manager with a good track record in managing mutual funds will result in good returns for the lowest risks.


Are Debt Funds Risky?

Debt funds are generally low-risk investments that are specially created to provide more than average returns with the lowest risks. The funds offer various options based on your risk tolerance and investment horizon. So, to answer your question, Debt funds are not very risky investments.

How To Invest In Debt Mutual Funds?

Investing in Debt Mutual Funds is now easy with the help of MFonline. The process begins with registering yourself on the MFonline website, completing your KYC procedure and, "bingo" you can now invest in any fund you wish to. Or you can also contact the mutual fund experts at MFonline to guide you through the whole process and suggest you the best mutual fund in the market based on your goals and needs.

Why Is It Important To Match My Investment Horizon With The Fund?

Certain debt funds are created with the motive of fulfilling goals over a particular period of time and providing profits based on those goals within the mentioned time frame. It is necessary to match your investment horizon with that of the debt fund to efficiently achieve your goals with the least risks and the best possible returns.

Well, we are sure all your questions about Debt funds are now answered, and now that you know everything about these funds. It is time to get in touch with MFonline and start investing in the best debt mutual funds to achieve your financial goals efficiently. To know all about ELSS Funds and how to invest in them, Click here.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.

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