Mutual Funds · Debt funds
Debt Mutual Funds
Debt MFs invest in bonds, govt securities, money-market instruments — designed for stable returns + low volatility. After Apr 2023, indexation benefit was REMOVED — gains taxed at slab rate regardless of holding period. Still useful as: emergency fund (Liquid / Overnight), short-goal parking (1-3 yr), or fixed-income allocation in retirement.
Who needs this
Anyone needing stable returns: retirees (regular income via SWP), emergency fund (Liquid / Overnight), short-goal parking (Ultra Short / Low Duration), or fixed-income leg of portfolio (Corporate Bond / Banking & PSU).
Category at a glance
Typical YTM
6.5-8.5%
Pre-tax
Volatility
0-3%
Lowest of MF categories
Expense ratio (direct)
0.2-0.8%
Lower than equity
Tax (post-Apr 2023)
Slab rate
No indexation
Min holding (vs FD)
1 day
Liquid funds
Liquidity
T+1
Most categories
Top 5 debt mutual funds
Source: AMFI + AMC factsheets · refreshed quarterly
| Fund | AMC | Expense % | 3y CAGR |
|---|---|---|---|
| ICICI Pru Liquid Fund | ICICI Pru | 0.20% | 6.8% |
| HDFC Corporate Bond | HDFC | 0.32% | 7.2% |
| Aditya Birla SL Banking & PSU | Aditya Birla | 0.39% | 7.4% |
| SBI Magnum Gilt Fund | SBI | 0.46% | 7.9% |
| Kotak Money Market Fund | Kotak | 0.21% | 7.0% |
Key decisions
- Q1
Which debt sub-category for which goal?
Emergency fund: Liquid / Overnight. 6m-1yr: Ultra Short / Low Duration. 1-3yr: Short Duration / Banking & PSU. 3yr+: Corporate Bond / Gilt. Don't buy long-duration funds for short goals.
- Q2
Debt MF vs FD post-Apr 2023?
Tax is now identical (slab rate). FD wins on simplicity + DICGC ₹5L insurance. Debt MF wins on liquidity (no premature withdrawal penalty) + slightly higher returns + diversification.
- Q3
Risk in debt funds?
Credit risk (issuer default — Franklin shock 2020). Duration risk (rate-rise = NAV drop in long-duration funds). Liquidity risk (Liquid funds have side-pocket provisions). Stick to AAA-quality, low-duration if conservative.
SEBI rules + scheme specifics
- 16 SEBI-defined debt categories — Overnight to Long Duration to Gilt.
- Macaulay Duration determines category boundary (e.g. Short = 1-3 yr).
- Post-Apr 2023: indexation removed; gains taxed at slab rate.
- Credit Risk Funds: hold ≥ 65% in AA-or-below; higher yield + higher risk.
- Side-pocketing allowed for distressed assets to protect existing investors.
Calculators + tools
All mutual funds
Recommended →Free MF Overlap Analyzer — see if your funds duplicate