The five large debt funds compared here earned between 6.7% and 7.7% a year over the three years to 31 August 2026, and units bought since 1 April 2023 are taxed at your slab rate, just like FD interest. So the best debt mutual fund in India for you is mostly the one whose duration matches when you need the money. A debt fund lends your money to the government, banks and companies by buying their bonds, treasury bills and other short-term paper, and you earn the interest they pay, plus or minus changes in their market price. Below are the main types, with one or two large funds from each, using data to September 2026.
Types of Debt Funds
SEBI sorts most debt funds by Macaulay duration: roughly, the average time, in years, until the fund gets its money back from the bonds it holds. The longer the duration, the more the fund's price moves when interest rates change. In February 2026 SEBI renamed several categories; the new names are used below.
| Type | SEBI rule | Sensitivity to rate changes | Often used for |
|---|---|---|---|
| Liquid Fund | Only instruments maturing within 91 days | Very low | Parking money for days or weeks; part of an emergency fund |
| Ultra Short Term Fund | Macaulay duration 3–6 months | Low | Money needed in a few months |
| Ultra Short to Short Term Fund (formerly Low Duration) | Macaulay duration 6–12 months | Low | Money needed in about a year |
| Short Term Fund (formerly Short Duration) | Macaulay duration 1–3 years | Moderate | Goals one to three years away |
| Corporate Bond Fund | At least 80% in bonds rated AA+ and above | Moderate; depends on the fund's duration | Goals two to three years or more away |
Category rules from SEBI's scheme categorisation circular of 26 February 2026.
Five Debt Funds Compared
| Fund (current name) | Category | 1 year | 3 years (a year) | 5 years (a year) | Expense ratio | AUM (₹ Cr) |
|---|---|---|---|---|---|---|
| Parag Parikh Liquid Fund | Liquid | 6.41% (6.43%) | 6.71% | 6.05% | 0.10% | 6,721.83 |
| HDFC Ultra Short to Short Term Fund (formerly HDFC Low Duration Fund) | Ultra Short to Short Term | 6.35% (6.25%) | 7.44% | 6.71% | 0.46% | 17,793.01 |
| Bandhan Short Term Fund (formerly Bandhan Bond Fund – Short Term Plan) | Short Term | 6.57% (6.09%) | 7.73% | 6.47% | 0.36% | 8,730.74 |
| ICICI Prudential Corporate Bond Fund | Corporate Bond | 6.20% (5.40%) | 7.50% | 6.82% | 0.37% | 29,687.83 |
| HDFC Corporate Bond Fund | Corporate Bond | 5.17% (4.21%) | 7.15% | 6.31% | 0.38% | 30,286.08 |
Direct plan, Growth option. Returns calculated from AMFI NAVs to 31 August 2026; the 1-year return to 28 September 2026 is in brackets. Expense ratio is the headline Direct-plan figure and AUM is the month-end figure, both as of 31 August 2026 (PPFAS and HDFC factsheets; Groww scheme data for Bandhan and ICICI Prudential). Since April 2026, fund houses show a base expense ratio plus statutory levies, so older expense figures are not directly comparable.
What the table tells you
- Returns sit in a narrow band. Over three years, all five earned between 6.7% and 7.7% a year. Debt funds do not produce equity-like returns, and a fund that promises far more than its peers is usually taking more credit risk.
- Longer duration has not paid off recently. The two corporate bond funds had the weakest one-year returns to September 2026 (4.2–5.4%), below the liquid fund's 6.4%. Both also had a small negative return in the month to 28 September 2026.
- Cost matters more than in equity funds. When a fund earns 6–7% a year, a 0.3 percentage point difference in expense ratio is a large share of your return. Compare expense ratios within the same category.
- Yield is a guide, not a promise. As of 31 August 2026, the yield to maturity (the return the portfolio would earn if every bond were held to maturity at current prices, before expenses) was 6.14% for Parag Parikh Liquid, 7.48% for HDFC Ultra Short to Short Term and 7.61% for HDFC Corporate Bond, per the fund factsheets.
Interest Rates and Debt Fund Returns
When interest rates fall, existing bonds become more valuable and debt fund prices rise. When rates rise, prices fall. The longer a fund's duration, the bigger the effect. A liquid fund barely moves; a corporate bond fund with a duration of around three to four years can gain or lose noticeably in a few weeks.
At its 7 October 2026 meeting, the RBI raised the repo rate (the rate at which it lends to banks) by 0.25% to 5.50% and changed its stance to "calibrated tightening". Rising rates push bond prices down, which hurts longer-duration funds most. Nobody can reliably forecast the next move, so the safer approach is to match the fund's duration to when you need the money rather than bet on rates.
A Liquid Fund Is Not a Savings Account
- Redemption takes a working day. Normal redemptions are paid the next business day. Some fund houses offer instant redemption, capped at ₹50,000 or 90% of your holding in the scheme, whichever is lower, per day.
- Returns are not guaranteed. Liquid funds rarely fall, but the NAV (price per unit) can dip if a bond they hold is downgraded.
- Credit risk is real in riskier debt funds. In April 2020, Franklin Templeton wound up six debt schemes that held lower-rated corporate bonds. These were credit-oriented funds, not liquid funds, but the episode showed that debt funds can lose value and that withdrawals can be frozen.
Read more in liquid fund vs savings account vs FD and where to keep your emergency fund.
Debt Fund vs Fixed Deposit
| Debt fund | Bank FD | |
|---|---|---|
| Return | Not fixed; moves with rates and bond prices | Fixed when you book it |
| Safety | No guarantee | Deposit insurance up to ₹5 lakh per depositor per bank |
| Early exit | Redeem any business day; some schemes charge an exit load for a short period | Usually a penalty on premature withdrawal |
| Tax rate (units bought on or after 1 Apr 2023) | Your income-tax slab rate, whatever the holding period | Your slab rate |
| Tax rate (units bought before 1 Apr 2023) | 12.5% without indexation if held more than 24 months; slab rate otherwise | Not applicable |
| When tax is due | Only when you redeem | Every year, as interest accrues |
| TDS | None on redemption for resident individuals | Deducted if interest exceeds ₹50,000 a year (₹1 lakh for senior citizens) |
Tax rules for units sold from 1 April 2025; the Income-tax Act, 2025, in force from 1 April 2026, carries them forward. TDS thresholds apply from FY 2025-26.
What this means: TDS is not an extra tax, just tax collected in advance. For most new investments, a debt fund and an FD are taxed at the same slab rate. The real tax difference is timing: an FD is taxed every year, while a debt fund is taxed only when you sell, so the tax on its growth is deferred. The same logic applies to a systematic withdrawal plan (SWP): only the gain in each withdrawal is taxed, which spreads the tax out, but the rate is still your slab rate. Try the FD calculator or SWP calculator to compare.
How to Pick a Debt Fund
- Match duration to your goal. Money needed within weeks: liquid fund. In about a year: ultra short or ultra short to short term. In two to three years: short term or corporate bond fund.
- Check credit quality. Look at the share of the portfolio in government securities and AAA-rated bonds in the latest factsheet. Avoid credit risk funds unless you understand the extra risk; see credit risk funds explained.
- Compare expense ratios within a category. Use the Direct plan; see direct vs regular plans.
- Look at more than one period. A single year can flatter or punish a fund because of where rates moved.
For deeper guides on each category, see short vs ultra short duration funds, corporate bond funds, banking and PSU funds and gilt funds. For the full tax picture, read mutual fund tax in India.
How Much to Keep in Debt
There is no single right number. Many people keep their emergency fund and any money needed within three years in debt, and use debt funds to steady a long-term equity portfolio, raising the debt share as a goal gets closer. Our financial planner can help you set a split for your own goals.
This guide explains how these options compare. It is not a recommendation to buy any specific fund or product.
Run your numbers: compare a debt fund with a bank deposit using the FD and RD calculator, and if you plan regular withdrawals, see how long the money lasts with the SWP calculator. For a one-time investment, use the lumpsum calculator.
