Steady Returns: Why Debt Funds Are India’s Go-To Investment Now

Debt mutual funds are reaffirming their status as a relatively stable investment avenue in India, especially as market participants seek safer options amid ongoing volatility in equities and shifting interest rate expectations. With the Reserve Bank of India (RBI) signaling possible rate cuts and fiscal discipline, debt funds are attracting renewed interest from both retail and institutional investors.

 

Key Highlights

 

•⁠  ⁠Outperformance Over Fixed Deposits: Over 260 debt mutual funds have outperformed the State Bank of India’s fixed deposit rate of 6.7% over the past two years, with top performers like DSP Credit Risk Fund delivering an impressive 18.7% return. Other notable funds include HSBC Credit Risk Fund (13.8%) and Aditya Birla SL Credit Risk Fund (12%).

 

•⁠  ⁠Favorable Interest Rate Environment: The 10-year government bond yield has declined for two consecutive months, dropping from 6.51% in April to 6.18% in May 2025. This trend is driven by expectations of further RBI rate cuts and improved fiscal management, which bodes well for debt fund returns.

 

•⁠  ⁠FPI Inflows Surge: Foreign Portfolio Investors (FPIs) turned net buyers in Indian debt markets in May 2025, injecting ₹11,090 crore, spurred by relaxed investment norms and rate cut optimism.

 

•⁠  ⁠Diverse Investment Options: Debt funds offer a range of categories—short, medium, and long-term, government-backed, and credit risk—allowing investors to tailor portfolios according to their risk appetite and investment horizon.

 

•⁠  ⁠Laddering and SIP Strategies: Experts recommend a laddering approach—investing across different maturities—and using Systematic Investment Plans (SIPs) to mitigate reinvestment risk and smooth out returns over time.

 

Outlook

 

With interest rates expected to trend lower and government borrowing well managed, debt funds are poised to remain a cornerstone of stable, income-generating portfolios. Investors are encouraged to select funds aligned with their goals and risk tolerance, as the outlook for debt funds appears robust for the near to medium term.

 

Source: Economic Times, ET Money, India Infoline