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Best Debt Mutual Funds

With the market momentum all set to pick up, there is a growing curiosity among investors about the Best Debt Mutual Funds in 2021. Moreover, debt mutual funds invest in fixed-income instruments like T-bills, government securities, corporate bonds, etc. We cover them in this article with the finest recommendations for our readers. Let's begin!

What are Debt funds?

Debt mutual funds primarily invest in fixed-income or fixed-interest instruments like T-bills and Certificate of Deposits. Moreover, wealth creation through the interest earned as well as capital appreciation over the long term is the primary goal of these funds. Also, the assets within the fund thus generate a fixed rate of return over the tenure of investment.

Furthermore, a debt fund manager carefully picks the assets for investment based on credit ratings. Moreover, a higher credit rating thus suggests that the security has a greater chance of paying the regular interests as well as repay the principal on maturity. Also, the manager revises his strategy as per the interest rate movements.

Which are the best Debt funds in India?

The table below shows the best performing debt mutual funds with their 5-year returns and risk profiles,

Fund 3-Year Performance 5-Year performance Risk 
ICICI Prudential Multicap Fund - Dividend 13.05 % 11.54 % Very High 
NIPPON INDIA GILT SECURITIES FUND - Direct Plan-Growth 10.44 % 11.47 % Moderate 
IDFC Government Securities Fund-Constant Maturity Plan-Growth-Direct 10.37 % 12.82 % Moderate 
IDFC Government Securities Fund-Investment Plan-Growth-Direct Plan 10.17 % 12.33 % Moderate 
SBI Magnum Medium Duration Fund - Direct Plan-Growth 10.15 % 10.45 % Moderate 
ICICI Prudential Constant Maturity Gilt Fund - Direct Plan-Growth 10.14 % 12.31 % Moderate 
ICICI Prudential All Seasons Bond Fund - Direct Plan-Growth 10.01 % 10.43 % Moderate 
SBI Magnum Constant Maturity Fund - Direct Plan-Growth 9.97 % 11.01 % Low to Moderate 
DSP Government Securities Fund - Direct Plan-Growth 9.93 % 11.82 % Moderate 
ICICI Prudential Constant Maturity Gilt Fund 9.92 % 12.09 % Moderate 

Who Should Invest in Best Debt Mutual Funds?

Debt mutual funds are thus best suited for those investors who have a low-risk appetite and subsequently do not want any equity exposure. Also, debt funds offer wealth appreciation to investors with little to no risk at all. Moreover, these funds aim to provide investors with a regular income. Consequently, the investors stay invested in such funds for a short to medium-term horizon.

Also, investors with a short-term view who deposit their surplus money in a savings bank account can thus opt for Liquid funds. Subsequently, these funds offer a return of 7% to 9%. On the contrary, those investors who wish to thus beat the interest-rate volatility should go for dynamic bond funds.

Furthermore, such funds are best suited for the medium-term horizon and offer a better return in comparison to a 5-year bank FD.

Taxation of Debt Fund

Until January 2020, the dividend thus earned from the mutual funds was tax-free for the investors. The fund house was to subsequently pay the required tax as per the rates before settling the dividend with the investors. However, Union Budget 2020 changed this scenario and the taxation is now classical.

Thus, it now means that dividends will be added to the income of the investor and would be taxed as per the slabs they fall under. Moreover, the capital gains are taxed as per the holding period. If the investor sells the debt fund units within 3 year holding period, it attracts short-term capital gains.

Gains were added to their net income and taxed as per the relevant slabs. Finally, if the investor sold their debt fund units after 3 years, it attracted long-term capital gains of 20% after indexation.

Best debt funds

Things to consider before Investing in Debt Funds

The investors must therefore consider the following factors before they invest in the best debt mutual funds,

1. Objectives: Debt funds also invest across a range of securities, and hence give predictable returns. Thus, it suits most conservative investors.

2. Risks: Like all investments, credit risk, liquidity risk, and interest rate risk too affect debt funds. Any change in the interest rates will impact these funds. Thus, investors should consider such risks before investing.

3. Categories: Debt funds are thus of various types, such as,

i. liquid funds

ii. monthly income plans

iii. fixed-maturity plans

iv. dynamic bond funds, etc.

Consequently, each of these funds has its own objectives and benefits. Investors will thus need to assess their goals and choose the relevant funds.

4. Cost: Moreover, every debt fund charges an expense ratio to manage the funds. However, this fee cannot exceed the limit set by SEBI. Also, this fee varies across different mutual funds.

5. Duration: Liquid funds are thus ideal for those investors who wish to invest for a span of 3 months. Furthermore, those seeking to thus invest in excess of say 2 to 3 years, can opt for Short-term bond funds.

6. Investment goals: Debt funds can thus provide an additional income or liquidity and perform better than a regular savings account. Thus, the choice of funds depends on the investor's goals.

Best debt funds

Advantages of Debt Funds

Below are some of the many advantages of the best debt mutual funds which the investors must know,

1. Not impacted by the market: Market movements thus do not impact the performance of debt funds. Thus, they are subsequently less volatile in comparison to equity funds. Moreover, the portfolio of such funds comprises only fixed-income securities.

2. Ideal for new investors: First-time investors and beginner's in the stock market can try debt funds to start their investment. This will subsequently give them an understanding of the capabilities of mutual funds.

3. Balanced portfolio: As the fund majorly invests in fixed-income instruments, the returns are thus far more stable and predictable. Investors who don't want to take big risks can hence go for this.

4. Suitable for keeping excess funds: If you thus wish to park your excess money, you can consider debt funds. Consequently, earning better returns as compared to a regular savings account.


Debt funds offer a great opportunity to earn an additional income, beat inflation, and are subsequently less volatile in comparison to equity funds. Moreover, these funds are of various types like liquid funds, monthly income plans, fixed-maturity plans, dynamic bond funds, etc. with different objectives. It can prove ideal for new investors who are risk-averse. Also, the minimal impact of market movements on these funds makes them attractive. Debt funds are thus popular for stable returns.

Thus, making an informed choice on the best debt mutual funds is consequently vital to have a great investing experience. Happy investing!!

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