5 Best Debt Mutual Funds to Invest in 2023


Debt mutual funds offer you the opportunity to realise your goals by generating stable returns without taking a very high risk. Thus, they act as a suitable avenue to diversify your mutual fund portfolio. In this article, find out PersonalFN's list of the 5 best debt mutual funds to invest in 2023.


What are Debt Mutual Funds?

Debt mutual funds are schemes that predominantly invest in fixed-income generating instruments such as corporate bonds, government bonds, certificates of deposits, treasury bills, etc. These funds aim to provide diversification and stable returns as they are less volatile compared to equity mutual funds. This makes debt mutual funds suitable for investors with low-risk profile and a short to medium-term investment horizon.

[Read: 5 Best Low-Risk Mutual Funds to Invest in 2023]

The prevailing interest rate environment is one of the most crucial factors that affect the performance of a debt mutual fund. Apart from this, the credit quality and the maturity of the underlying securities in the portfolio can impact their returns.

Risk-return profile of debt mutual funds

For illustration purpose only

Fixed Deposits vs Debt Mutual Funds: Which is better?

Fixed Deposits (FDs) are a suitable investment option if you are looking for guaranteed returns over the short to medium term with little or no risk. But, if you are willing to take low to moderate risk, investment in debt mutual funds can potentially generate higher returns than fixed deposits, especially during a falling interest rate scenario. Moreover, debt mutual funds are an excellent option to diversify your portfolio with low-risk investment avenues that have high liquidity.

[Read: Fixed Deposits v/s Debt Funds: Which Is a Better Investment Option?]

Why invest only in the best debt mutual funds in 2023?

Although debt mutual funds are relatively less risky than equity mutual funds, they aren't 100% safe. There have been instances in the past where even the safest categories have incurred heavy losses due to exposure to low-credit quality papers.

Thus, as an investor, it is important to consider only the best debt mutual funds that give preference to safety over chasing returns by investing in risky debt instruments. Opt for debt mutual fund schemes that hold high-quality papers, such as those issued by the government or quasi-government entities.

It is also important to understand that it would be prudent to avoid selecting the 'best debt mutual funds' based on their past performance. The sub-categories and schemes that performed well in the past may not necessarily do well in the future. Instead, pay attention to your risk profile and time horizon when investing in debt funds which will help to mitigate the impact of interest rate risk and credit risk.

Image source: www.freepik.com - photo creared by jcomp

Is the current environment conducive for investment in debt mutual funds?

Debt Mutual Funds generated muted returns in the past few years due to rate hike actions by the RBI. The central bank has increased policy rates by 250 bps so far in the current financial year to tame elevated inflation levels due to the aftermath of COVID-19 and the Russia-Ukraine war.

Given that inflation is cooled off from its peak in recent months, there is consensus that RBI might hit the pause button on rate hike actions now before taking any decision to cut the policy rates.

When interest rates rise, debt mutual funds that invest in short-term securities gain. Funds that invest in the short maturity segment witness minimal mark-to-market impact when interest rates rise. On the other hand, funds focusing on longer-duration instruments that have an average maturity typically in a range of 5 to 10 years are highly vulnerable to interest rate risk.


However, given the fact that we may be nearing the end of the rate hike cycle, debt mutual funds (including medium to long-duration funds) are likely to do better over the short to medium-term. This makes it a good time to get into duration funds with a long-term view.

For an investment horizon of up to or less than a year, short-term debt mutual fund categories such as Liquid Funds continue to be attractive.

Meanwhile, if you are a moderate risk taker and have an investment horizon of around 2 to 3 years, you may consider Banking & PSU Debt Funds and Corporate Bond Funds. These categories typically benefit during stable and falling interest rate scenarios.

For a longer investment horizon of, say, 4-5 years or more, medium to long-duration funds such as Gilt Funds are likely to benefit from the rally in bond markets during the next easing interest rate phase and could be a decent bet for aggressive investors.

If you are willing to take a slightly higher risk, you may consider Conservative Hybrid Funds that have the flexibility to invest across durations and credit profiles and also allocate some portion in equities to boost returns.


Which are the best debt mutual funds to invest in 2023?

List of 5 best debt mutual funds to invest in 2023

Scheme Name Absolute (%) CAGR (%)
6 Months 1 Year 2 Years 3 Years 5 Years
SBI Conservative Hybrid Fund 3.39 5.86 8.69 10.55 8.95
Aditya Birla SL Corp Bond Fund 3.06 4.44 4.84 6.42 7.46
DSP G-Sec Fund 2.83 3.81 4.25 5.89 8.67
Axis Banking & PSU Debt Fund 2.50 4.20 4.29 5.46 7.20
Quantum Liquid Fund 3.00 5.06 4.15 3.91 4.84
Past performance is not an indicator for future returns
Data as of February 16, 2023. Direct plan - Growth option considered
(Source: ACE MF)

Best debt mutual fund to invest in 2023 - Liquid Fund category - Quantum Liquid Fund

Liquid funds are open-ended debt mutual funds that primarily invest in short-term money market instruments such as CDs, CPS, call money, treasury bills, and so on, with a maturity of up to 91 days. A Liquid Fund is suitable if you have a very low-risk appetite (prefer safety and liquidity over returns), wish to park money for the short-term, for contingency planning, to address short-term goals, and/or to tactically shift money from an equity fund (via the Systematic Transfer Plan) to offset volatility. One of the best Liquid Funds to invest in 2023 is Quantum Liquid Fund.

Top holdings of Quantum Liquid Fund

Top holdings % of assets
91 Days Treasury Bill - 23-Feb-2023 12.65
182 Days Treasury Bill - 23-Feb-23 8.44
91 Days Treasury Bill - 09-Mar-2023 8.42
182 Days Treasury Bill - 23-Mar-2023 8.39
State Bank Of India (03-Apr-23) 8.37
Data as of January 31, 2023
(Source: ACE MF)

Quantum Liquid Fund is a cautiously managed liquid fund that gives high preference to safety and liquidity over returns. The fund resists from taking higher credit risk associated with debt instruments issued by private issuers and focuses on investing only in Government and Quasi-Government securities. As of January 31, 2023, Quantum Liquid Fund held 48.8% of its assets in Treasury Bills, 23.5% in CDs, 12.7% in high-rated Corporate Debt, 4% in CPs, and balance in cash. It has an average maturity of 42 days and a YTM of 6.7%.

Asset allocation of Quantum Liquid Fund

Data as of January 31, 2023
(Source: ACE MF)

With a focus on Government and Quasi-Government securities, Quantum Liquid Fund may not generate a high yield for investors, but it can be expected to stand strong in terms of offering safety to investors hard earned money. Further, with its portfolio dominated by short-maturity instruments, it hardly exposes investors to credit risk.

Best debt mutual fund to invest in 2023 - Corporate Bond Fund category - Aditya Birla SL Corporate Bond Fund

Corporate Bond Funds are open-ended debt schemes mandated to invest a minimum of 80% of their assets in the highest-rated corporate bond instruments. These funds predominantly invest in AA+ and above rated corporate debt securities. Though there is no limit or restriction on portfolio duration, the duration for most corporate bond funds is typically in the range of 2 to 3 years. One of the best Corporate Bond Funds to invest in 2023 is Aditya Birla SL Corporate Bond Fund.

Top allocation of Aditya Birla SL Corporate Bond Fund

Top holdings % of assets
HDFC Bank Ltd. SR-2 07.86% (02-Dec-32) 3.90
GOI FRB 22-Sep-2033 3.61
Sikka Ports & Terminals Ltd. -SR-PPD-11 7.20% (16-Jun-23) 3.17
Bajaj Housing Finance Ltd. - 05.84% (21-Feb-24) 3.01
06.54% GOI 17-Jan-2032 2.85
Data as of January 31, 2023
(Source: ACE MF)

Aditya Birla SL Corporate Bond Fund is one of the oldest schemes in the corporate bond fund category and has a history of over 25 years to its credit. The fund majorly focuses on shorter-maturity debt instruments issued by private and public entities and holds significant allocation to g-secs. As on December 31, 2022, the fund held a highly diversified portfolio of around 167 securities. It held 62% in high-rated corporate debt instruments, 26% in government securities, 8.8% in floating rate instruments, PTC & Securitized Debt, and CDs, and the balance in cash. The average maturity of the fund was 2.3 years, while the YTM is 7.8%.

Asset allocation of Aditya Birla SL Corporate Bond Fund

Data as of January 31, 2023
(Source: ACE MF)

Aditya Birla SL Corporate Bond Fund is a well-managed fund that has turned out to be a superior performer and has delivered above-average returns across time periods. With a sheer focus on shorter-duration securities, the fund is capable of following an accrual strategy and has also managed to take advantage of changes in interest rates.

Best debt mutual fund to invest in 2023 - Banking & PSU Fund category - Axis Banking & PSU Debt Fund

Banking and PSU Debt Funds are mandated to invest in a minimum of 80% of their assets in debt instruments of banks, Public Sector Undertakings, and Public Financial Institutions. Portfolios of Banking and PSU Funds mainly comprise of Government and Quasi-government securities, along with some exposure to top names in the banking industry. These companies enjoy high-credit ratings (AAA or equivalent) and government backing, which makes them highly liquid and less prone to credit risk. One of the best Banking & PSU Debt Funds to invest in 2023 is Axis Banking & PSU Debt Fund.

Top allocation of Axis Banking & PSU Debt Fund

Top holdings % of assets
Power Finance Corpn. Ltd. 07.13% (08-Aug-25) 8.57
REC Ltd.-SR-218 07.56% (30-Jun-26) 7.22
Indian Railway Finance Corpn Ltd SR-168 A 07.40% (18-Apr-26) 6.68
Export-Import Bank Of India SR-Y-03 07.10% (18-Mar-26) 6.43
Bajaj Finance Ltd. SR-286 TR 9 07.90% (17-Nov-25) 5.99
Data as of January 31, 2023
(Source: ACE MF)

Axis Banking & PSU Debt Fund aims to generate stable returns at a lower credit risk while keeping the portfolio duration in check, which helps it control interest rate risk as well. It typically holds a portfolio of high credit quality, with major allocation to top-rated corporate bond instruments issued by Banks, PSUs, and PFIs. As of January 31, 2023, Axis Banking & PSU Debt Fund's portfolio was invested across as many as 116 securities having an average maturity of 3 years and YTM of 7.5%. It held 85.8% of its assets in corporate debt issued by PFIs, PSUs, and top-rated banks, along with 9.7% in government securities.

Asset allocation of Axis Banking & PSU Debt Fund

Data as of January 31, 2023
(Source: ACE MF)

The investments in residual maturity bonds within low to medium maturity help the fund take advantage of the accrual opportunities in this space. Moreover, the fund manager has the flexibility to switch the portfolio duration depending on his views on the macroeconomic conditions, interest rate directions, systemic liquidity, and other factors. Thus, the fund has the ability to reward conservative investors with reasonable risk-adjusted returns on their investments without exposing them to higher credit risk.

Best debt mutual fund to invest in 2023 - Gilt Fund category - DSP G-Sec Fund

Gilt Funds are open-ended debt schemes that invest a minimum of 80% of their assets in government securities. These securities are issued by RBI on behalf of the government (central or state) and are used to fund various government projects. Backed by the government, these securities are highly liquid and carry very low credit risk. However, depending on the duration of the portfolio, they may carry interest rate risk. One of the best Gilt Funds to invest in 2023 is DSP G-Sec Fund.

Top holdings of DSP G-Sec Fund

Top holdings % of assets
07.38% GOI - 20-Jun-2027 48.18
Cash and Equivalents 23.00
91 Days Treasury Bill - 16-Feb-2023 11.85
GOI FRB 22-Sep-2033 10.88
07.26% GOI - 22-Aug-2032 6.09
Data as of January 31, 2023
(Source: ACE MF)

DSP G-Sec Fund has done exceptionally well in terms of performance and has turned out to be an above-average performer in its category across time frames. The fund has the flexibility to invest across maturities based on the movement of interest rates, which has helped it generate better risk-adjusted returns for long-term investors. As of January 31, 2023, DSP G-Sec Fund had allocated 65.2% of its assets towards government securities, 11.8% in treasury bills, and the balance in cash. The average maturity of the fund stood at 3.9 years with a YTM of 7.1%.

Asset allocation of DSP G-Sec Fund

Data as of January 31, 2023
(Source: ACE MF)

The active management of the portfolio duration can help you navigate the rising and falling interest rate scenarios. It has been able to negotiate the fluctuation in interest rates and generate decent yields for investors across interest rate cycles in the past and is expected to do so in future as well. However, with a significant allocation to longer-duration instruments, the fund may be prone to higher interest rate volatility in the short term. But a falling interest rate scenario could potentially benefit DSP G-Sec Fund

Best debt mutual fund to invest in 2023 - Conservative Hybrid Fund category - SBI Conservative Hybrid Fund

Conservative Hybrid Funds, also known as Debt Hybrid Funds, are mandated to invest 75% to 90% of total assets in debt instruments, along with 10% to 25% of total assets in equity & equity-related instruments. The debt portion of their portfolio intends to provide the safety and stability of regular income from coupon payments, whereas the equity portion has the potential of generating extra income through dividends along with capital appreciation over a period. The debt investment of conservative hybrid funds can be spread across durations and credit profiles, while the equity portion can range across market capitalisation and sectors. One of the best Conservative Hybrid Funds to invest in 2023 is SBI Conservative Hybrid Fund.

Top holdings of SBI Conservative Hybrid Fund

Top holdings % of assets
07.54% GOI 23-May-2036 3.14
08.64% Madhya Pradesh SDL - 03-Sep-2033 2.96
07.78% Maharashtra SDL - 27-Oct-2030 2.80
07.38% GOI - 20-Jun-2027 2.79
Bharti Telecom Ltd. -SR-X 8.80% (21-Nov-25) 2.78
Data as of January 31, 2023
(Source: ACE MF)

SBI Conservative Hybrid Fund has excelled in terms of performance and has occasionally figured among the list of top category performers, as well as rewarded investors with superior risk-adjusted returns. On the equity side, the fund follows a multi-cap approach to offer diversification across market caps. As of January 31, 2023, SBI Conservative Hybrid Fund held around 41.3% of its assets in moderate to high-rated Corporate Debt instruments, 24.5% in G-secs, and around 4.3% in CPs and CDs. The equity and equity-related exposure in the fund's portfolio stood at around 21.5% of its assets.

Asset allocation of SBI Conservative Hybrid Fund

Data as of January 31, 2023
(Source: ACE MF)

The fund's strategy of holding a well-diversified debt portfolio spread across moderate and top-rated issuers has helped it diversify the risk so far. However, the fund may come under pressure if any of the portfolio holdings from moderate to high-rated private issuers face a default risk or a rating downgrade.

How are debt mutual funds taxed?

Till the financial year (FY) 2022-23, Short Term Capital Gain (STCG), i.e., gains arising on debt mutual fund units redeemed within three years, were taxable as per the applicable income tax slab to which the investor belongs.

Meanwhile, the Long Term Capital Gain (LTCG), i.e., gains arising on debt mutual fund units redeemed after a holding period of three years, were taxed at the rate of 20% with indexation benefits. The indexation benefit allowed investors to adjust the purchase price of debt funds for inflation and bring down the tax on capital gains.

However, the Finance Bill 2023 amended the debt mutual fund taxation rule by removing the indexation benefit in case of long term capital gains on these funds. This means that from FY 2023-24 onwards, even the long term capital gains on redeeming debt mutual fund units will now be taxed as per the income tax rate applicable to investors, without inflation adjustment. Accordingly, debt mutual funds are now par with Bank FDs in terms of taxation.


Always remember, when you invest in debt funds, your primary aim should be the preservation of capital; returns come secondary. To select the best debt mutual fund, it is important to assess the following parameters:

  • The credit quality of the underlying securities

  • The average maturity profile

  • The historical performance

  • The risk ratios

  • The investment processes & systems at the fund house

Lastly, remember that though debt mutual funds are relatively stable compared to equity mutual funds, the returns are not guaranteed. However, if you choose schemes carefully, they can offer you opportunities for effective diversification and asset allocation.



The schemes mentioned above are selected on the basis of PersonalFN's SMART Score, which considers various quantitative and qualitative parameters to arrive at fundamentally sound and reliable mutual fund schemes. These schemes may or may not be suitable for you. Hence, it is necessary that you understand your risk appetite and suitability well in case you consider investing in any of these funds. If unsure, do consult your SEBI registered investment advisor.

This does not constitute investment advice. Returns mentioned herein are in no way a guarantee or promise of future returns. Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully before investing.

DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.

Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.