Debt Income Funds

1. Open ended funds
   1. These funds can be sold and repurchased all around the year. Examples of these funds are MIPs, short term funds, gilt funds, etc. These funds do not have an entry load, whereas if they are withdrawn within a specific duration, there may be an exit load.
2. Close ended funds
   1. Close ended funds can be purchased only during the NFO. You cannot continue to invest in it once the NFO closes. These funds are limited to a specific time period and there are very low chances of exiting. In comparison to open ended funds, the risk factor in these funds are lower.

Benefits of Investing in Debt Income Funds

Debt income funds offer several advantages for conservative investors:

1. These funds are less volatile than equity funds and aim to deliver stable and predictable returns. They invest in fixed-income securities, which provide regular interest income.
2. Most debt funds can be easily redeemed when needed.
3. Debt funds are also more tax-efficient than traditional fixed deposits if held for over three years.
4. Additionally, investors can choose from a variety of options like short-term, long-term, liquid, or corporate bond funds, based on their financial goals.

Features of Debt Income Funds

1. Debt Income funds have a fixed maturity period.
2. Easy liquidity makes it an easy to manage investment.
3. Tax free dividend: The dividend earned on a debt income fund is tax exempted. If an investor holds the fund for over 3 years, the debt fund comes under long term funds and 20% tax is applied on it, after indexation. Even TDS is not deducted from the gains on the fund.

How to Choose a Debt Fund?

The following factors must be considered while choosing a debt fund:

1. Past Performance - It is a good idea to do some research on the debt income fund. The past performance of the fund helps in knowing about the fund's performance consistency. However, it does not necessarily speak of the future performance of the fund.

1. Requirement - Before investing in a debt fund, you must understand what your requirement is and what you expect to gain out of the fund. You must know the duration and type of fund before choosing a fund.

1. AUM (Assets Under Management) Fund House - The AUM of a fund house also helps in deciding the fund. Fund houses that have over 500 crore AUM should be considered over others. Higher the AUM, lower is the expense ratio. Such fund houses tend to be more trustworthy.

1. Exit Load - You should always know the exit load charges of the debt fund, in case you want to exit your money before the maturity date.

1. Asset Allocation - When investing, you must have the knowledge of the fund you have invested in. This allows you to understand the assets that you are comfortable investing in.

Top Performing Debt Income Funds in India 2025

Looking for the best-performing debt funds? Here are a few high-rated debt income funds in India for 2025:

1. ICICI Prudential Corporate Bond Fund
2. HDFC Short Term Debt Fund
3. Axis Treasury Advantage Fund
4. SBI Magnum Medium Duration Fund

These funds have consistently delivered stable returns over 1–3 years and are managed by experienced fund managers. While past performance doesn't guarantee future returns, checking performance history, fund size, and credit rating can help make an informed choice.

What are Debt Income Funds and How They Work

Short Term Debt Funds

Short term debt funds are for short duration of time between six months to a year. These funds include certificate of deposits, bonds with 6 month maturity, commercial papers and other short-term corporate and government bonds. Short term funds mostly show a stable performance as they are unaffected by interest rate changes. Also, the returns from short term debt funds are higher when compared to liquid funds.

Medium Term Debt Funds

Medium term debt funds are investments with a maturity period of up to two years. Apart from including short-term instruments, these fund also hold a part of debt with a higher maturity and higher returns. At times, these medium term funds are referred to as short term debt funds by rating agencies.

Liquid Funds

Liquid funds are extremely short term funds with maturity period of few days to few months. Liquid fund investments include commercial papers, certificate of deposits, treasury bills, etc. These funds generate stable returns.

Gilt Funds

Gilt funds include investments in Government securities only. An investor can increase capital through these funds rather than have capital protection. Although there is no default risk associated with Gilt funds, there are interest rate related chances of risk, mostly in case of long term gilt funds.

These funds are sovereign-backed and hence safe with regard to credit quality, the higher maturity period makes it susceptible to risks due to interest rate cycles. Timing is very crucial in these funds and their volatile nature makes them a poor choice for retail investors who are looking to hedge their portfolio through debt funds.

Dynamic Bond Funds

Funds such as corporate and government bonds, money market instruments, debentures, certificate of deposits and commercial papers come under dynamic bond funds. Most of the funds in these category are dynamic in terms of maturity. The maturity period of these funds is usually between two years to more than three years. In case the interest rate cycle of these is funds is unidirectional for a long time, the fund holding should also be extended.

You should always keep the time frame in mind while selecting a debt fund for investing. If an investor is averse to risk, short-term debt funds is a better option relatively. A debt income fund is a safer option of investment than an equity fund if you are planning to invest a lump sum amount.

GST rate of 18% applicable for all financial services effective July 1, 2017.