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8 Types Of Debt Funds You Need To Know About In 2021

Want to know more about debt funds? Read this blog to find out everything you need to know about the 8 different types of debt funds available in India.
June 17, 2021

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“Debt Funds” is an umbrella term used to describe mutual funds that primarily invest in bonds, T-bills, commercial paper, money market, and other debt securities. 

The distinction within debt mutual funds lies in the type of debt securities they invest in (bonds, money market, etc) and the duration for which they hold their investments (overnight, 3-6 months, etc). 

Understanding the various types of debt funds will help you gauge the right fit for your portfolio based on your risk profile and investment goals. Let’s explore 8 of the most popular types of debt funds in India.

Types Of Debt Mutual Funds

#1. Short Term Funds

Short term funds invest in securities that mature in 1-3 years. Basically, that’s the time it takes for the fund to get its money back. Short duration funds generally invest in bonds issued by solid companies. 

As a result, short term funds have been known to generate better returns than bank FDs, in the range of 5-6%. Short term funds carry a relatively low-risk than equity and hybrid mutual funds. 

Facts Of Short Term Funds

1. Type: Open-ended debt fund 

2. Ideal for: 1-3 years

3. Average returns: 5-6%

4. Risk: Low

Note: This category can include any debt fund that has a portfolio maturity of one year or less. 

#2. Ultra Short Term Funds

Ultra short term funds invest in bonds and other debt instruments that mature in 3 to 6 months. These funds are ideal for the immediate short term and as a place to park cash for Systematic Transfer Plans (STPs). 

The average bank savings account generates 3% returns at best. Ultra short term funds fare better and have been known to produce returns between 4-5% on average.

As far as risk goes, ultra short term funds are known to be safer than most debt funds and equity funds because of the ultra-short lending period/investment tenure.  

Facts Of Ultra Short Term Funds

1. Type: Open-ended debt fund 

2. Ideal for: >3 months

3. Average returns: 4-5%

4. Risk: Low

Best Ultra Short Term Funds

Fund Name

1-Year Returns

Returns Since Inception

Minimum Investment Amount

HDFC Ultra Short Term Fund

4.69%

6.72%

₹5000

IDFC Ultra Short Term Fund

3.76%

6.46%

₹100

Explore Top Ultra Short Term Funds

#3. Liquid Funds

Liquid funds are the cooler cousins of ultra-short duration funds. The popularity of liquid funds is down to the high liquidity, safety, and solid returns that they offer. 

Furthermore, liquid mutual funds can have been known to produce better returns than both the average bank savings account and FDs. The average returns range from 5-7%. 

You can access the Cube ATM on the Cube Wealth app that lets you withdraw money instantly from your Nippon India Liquid Fund investment to your bank account. 

Facts Of Liquid Funds

1. Type: Open-ended debt fund 

2. Ideal for: 0-3 years

3. Average returns: 5-7%

4. Risk: Low

Best Liquid Mutual Funds

Fund Name

1-Year Returns

3-Year Returns

Minimum Investment Amount

Nippon India Liquid Fund

3.23%

5.55%

₹100

DSP Liquidity fund

3.28%

5.54%

₹500

View Full List Now

#4. Income Funds

Income funds tend to prioritize capital preservation by investing in low risk, low reward debt securities that generate a regular income. The term income funds are used to refer to these debt mutual funds:

a. Money Market Funds   

Money market funds invest in high rated debt securities found in the money market that are usually certificates of deposit, commercial papers, repo agreements, and others. 

Money market funds offer above-average safety because their portfolio matures in one year. As a result, the returns generated by money market funds are predictable in the range of 3-4%.

Facts Of Money Market Funds

1. Type: Open-ended debt fund 

2. Ideal for: 0-3 years

3. Average returns: 3-4%

4. Risk: Low

Best Money Market Funds 

Fund Name

1-Year Returns

Returns Since Inception

Minimum Investment Amount

Axis Money Market Fund

4.41%

5.92%

₹5000

HDFC Money Market Fund

4.57%

7.17%

₹5000

Invest Now

b. Corporate Bond Funds 

Corporate bond funds invest in debt securities issued by large corporations either for the short or long term. Corporate bonds pay a higher premium than other bonds because of the credit risk involved. 

Facts Of Corporate Bond Funds

1. Type: Open-ended debt fund 

2. Ideal for: 0-3 years

3. Average returns: 6-8%

4. Risk: Moderate

Best Corporate Bond Fund 

Fund Name

1-Year Returns

3-Year Returns

Minimum Investment Amount

ICICI Prudential Corporate Bond Fund

8.47%

8.51%

₹100

Invest Now

c. Banking & PSU Debt Funds

Banking & PSU debt funds generally invest in bonds issued by banks, public sector undertakings, and the government. The bonds issued by these entities are high grade, low-risk investments that generate solid returns. 

Facts Of Banking & PSU Debt Funds

1. Type: Open-ended debt fund 

2. Ideal for: 0-3 years

3. Average returns: 6-8%

4. Risk: Low

Best Banking & PSU Debt Funds

Fund Name

1-Year Returns

3-Year Returns

Minimum Investment Amount

IDFC Banking & PSU Debt Fund

6.70%

9.69%

₹5000

Axis Banking and PSU Debt Fund

6.32%

8.97%

₹5000

Invest Now

#5. Monthly Income Plans

Debt funds that fall under this category focus on generating a monthly income for the investor by investing in high-quality debt securities like government bonds and commercial paper. 

A part of the fund’s portfolio may invest in equity as well. However, the debt securities provide enough safety and cover for the returns to be predictable in the range of 2-5%. 

Facts Of Monthly Income Plans

1. Type: Open-ended debt fund 

2. Ideal for: 3+ years

3. Average returns: 2-5%

4. Risk: Low

Note: Monthly income plan debt funds are currently not recommended on the Cube Wealth app by Cube’s advisor, Wealth First. 

#6. Fixed Maturity Plans

Debt funds that fall under fixed maturity plans are generally close-ended, which means you can invest in them only during the new fund offer (NFO). Funds from this category allow you to choose an investment tenure (lock-in). 

Facts Of Fixed Maturity Plans

1. Type: Close-ended debt fund 

2. Ideal for: Varies

3. Average returns: 5-7%

4. Risk: Low

Note: Fixed Maturity Plan debt funds are currently not recommended on the Cube Wealth app by Cube’s advisor, Wealth First. 

#7. Dynamic Mutual Funds

Interest rate fluctuations have an impact on the desirability of bonds. If interest rates go up, bonds lose value. On the other hand, bonds gain value when interest rates fall. 

The management team of a dynamic mutual fund looks to leverage these changes to produce returns for their investors. Dynamic funds have historically produced 6-8% returns on average. 

Facts Of Dynamic Mutual Funds

1. Type: Open-ended debt fund 

2. Ideal for: 0-3 years

3. Average returns: 6-8%

4. Risk: Low

Best Dynamic Mutual Fund

Fund Name

1-Year Returns

3-Year Returns

Minimum Investment Amount

IDFC Dynamic Bond Fund

4.37%

10.06%

₹5000

Invest Now

#8. Debt Oriented Hybrid funds

Hybrid funds invest in both debt and equity. However, certain hybrid funds have more exposure to debt than equity. They’re known as debt oriented hybrid funds. The returns vary from 5-7% on average.   

Note: Debt Oriented Hybrid funds are currently not recommended on the Cube Wealth app by Cube’s advisor, Wealth First. 

How To Invest In Best Performing Debt Funds In India?

Debt funds are relatively safe and produce better returns than FDs and bank savings accounts. But there are simply too many options to choose from. 

This choice alone can put a damper on the investing experience. However, there’s an effective solution - the Cube Wealth app. Cube gives you access to world-class investment advice from Wealth First. 

Wealth First helps you cut through the noise by picking and curating a handful of the best performing debt funds in India. Furthermore, the recommendations are tailored to your risk profile and investment goals.

Here’s how you can access market-beating financial advice in a few clicks!

1. Download Cube Wealth 

2. Complete eKYC formalities

3. Take the risk analysis quiz

4. Get curated debt funds

5. Start investing

That’s it! Begin your wealth creation journey today by downloading the reliable and intuitive Cube Wealth app. Take Me To The App

Here’s how handpicked mutual funds work on the Cube Wealth app



Shriram Shekhar
Shriram is a Content Marketer at Cube Wealth, the Financial Freedom App with a smart Perfect Portfolio Planner. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. Shriram’s love for philosophy, product development, and empowering people through quality content is what got him to Cube Wealth.

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