Debt mutual funds are generally seen as a safe option for investors looking for stability, predictable returns and easy access to their money. But only a handful have managed to deliver equity-like long-term returns.
An analysis of 520 debt mutual funds based on Value Research data shows that just five schemes have delivered double-digit CAGR across the 3-year and 5-year periods. When it comes to the 10-year performance of these 5 funds, only 4 managed to top double-digit returns.
These funds have not only navigated changing interest-rate cycles, credit events and liquidity challenges but have also rewarded long-term investors with consistently strong performance.
Here’s a closer look at these five debt funds, including their returns, portfolio characteristics, risk profile and other key metrics.
Top-performing debt mutual funds in the long term
These funds have demonstrated relatively strong long-term SIP performance within the debt mutual fund category, with several delivering double-digit annualised returns across multiple investment horizons.
| Funds | 3-Year SIP Returns In % | 5-Year SIP Returns In % | 10-Year SIP Returns In % |
| DSP Credit Risk Dir | 16.66 | 15.36 | 11.00 |
| Bank of India Credit Risk Dir | 12.87 | 17.55 | 10.72 |
| ABSL Medium Term Dir | 11.44 | 12.02 | 10.53 |
| ABSL Credit Risk Dir | 14.53 | 12.75 | 10.30 |
| HSBC Credit Risk Dir | 12.80 | 11.17 | 8.64 |
Source: Value Research as of 2nd July 2026.
DSP Credit Risk Fund – Direct Plan
This fund was launched on January 01, 2013, and since its inception, the fund has generated 9.27% returns. The fund is currently managed by Vivekanand Ramakrishnan, Shalini Vasanta and Kunal Khudania and the fund has an expense ratio of 0.34%.
The fund has generated a mean return of 16.06%, significantly outperforming the credit risk category average of 9.49%.
The fund has allocated the majority of its portfolio to AA-rated securities (54.55%), which is broadly in line with the category average of 54.94%. The fund has a 15.22% allocation to Sovereign (SOV) securities, higher than the category average of 12.35%. Exposure to AAA-rated instruments stands at 10.14%, lower than the category average of 12.09%.
The fund has invested 7.93% in A and below-rated securities, almost in line with the category average of 7.85%, whereas the fund holds 5.67% in cash equivalents, lower than the category average of 8.25%.
Top 5 holdings: GOI Sec, Roadstar Infra Investment Trust InvITs, Aditya Birla Renewables Ltd Bonds/NCD, NUVOCO Vistas Corp Ltd Debenture and Tata Housing Devp. Co. Ltd SR I Debenture.
Asset allocation: 88.11% in debt, 6.22% in real estate and 5.67% Cash & Cash Eq.
Risk profile: The fund is classified as Moderately High Risk by Value Research. The fund’s standard deviation of 7.39% is higher than the category average of 2.40%, indicating that its returns have been more volatile than those of its peers.
The fund’s Sharpe ratio of 1.39 is lower than the category average of 1.89, suggesting it has generated comparatively lower risk-adjusted returns. The fund’s Sortino ratio of 8.40 is well above the category average of 5.30, indicating that it has generated amazing returns against the downside risk it has taken.
Bank of India Credit Risk Fund – Direct Plan
Since its launch on February 27, 2015, the fund has produced a 3.44% return. It is currently managed by Alok Singh and the fund has an expense ratio of 0.98%.
The fund has a 61.94% allocation to AA-rated securities, higher than the category average of 54.94%. It also holds a significantly higher cash equivalent allocation of 28.21% compared with the category average of 8.25%. Meanwhile, the fund’s AAA-rated exposure stands at 9.30%, lower than the category average of 12.09%.
The fund has delivered a mean return of 9.70%, marginally outperforming the credit risk category average of 9.49%, indicating competitive long-term performance.
Top 5 holdings: NUVOCO Vistas Corp Ltd Debenture, Birla Corporation Ltd SR-VI Debenture, Indian Bank CD, Nirma Ltd SR VII TR C Debenture, and Vedanta Ltd SR II Debenture.
Asset allocation: 71.79% in debt and 28.21% in Cash & Cash Eq.
Risk profile: The fund’s standard deviation of 4.11% is higher than the category average of 2.40%, suggesting that its returns have experienced greater volatility than the average credit risk fund. The fund’s Sharpe ratio of 0.95 is lower than the category average of 1.89, indicating comparatively lower risk-adjusted returns relative to its peers. The fund’s Sortino ratio of 11.02 is significantly higher than the category average of 5.30, reflecting strong downside risk-adjusted performance.
Aditya Birla Sun Life Medium Term Plan – Direct Plan
Since its launch on January 1, 2013, it has produced returns of 9.83%. The fund presently has an expense ratio of 0.71% and is managed by Sunaina da Cunha and Mohit Sharma.
The fund has delivered a mean return of 10.31%, comfortably outperforming the medium-duration debt category average of 7.86%, indicating superior long-term return potential.
The fund has allocated 36.00% to AA-rated securities, higher than the category average of 30.18%. It has 21.84% exposure to sovereign securities, lower than the category average of 28.26%, and 18.51% in AAA-rated instruments, also below the category average of 27.65%. Notably, the fund has a higher allocation of 14.16% to A and below-rated securities, compared with the category average of 4.03%. Cash equivalents account for 4.04% of the portfolio, below the category average of 6.46%.
Top 5 holdings: GOI Sec maturing on 06/10/2035, GOI Sec maturing on 08/04/2034, National Bank For Agriculture & Rural Development SR 26C Debenture, National Bank For Agriculture & Rural Development SR 26A Debenture and Hinduja Leyland Finance Ltd Debenture.
Asset allocation: 91.57% in debt, 4.4% in real estate and 4.04% in Cash & Cash Eq.
Risk profile: The fund’s standard deviation is 2.04%, slightly higher than the category average of 1.69%. The fund’s Sharpe ratio of 2.21 is significantly higher than the category average of 1.21, indicating it has generated substantially better risk-adjusted returns. With a Sortino ratio of 4.35, compared with the category average of 1.95, the fund has delivered considerably stronger returns relative to downside risk.
Aditya Birla Sun Life Credit Risk Fund – Direct Plan
Since its launch on April 17, 2015, it has produced returns of 9.56%. Sunaina da Cunha and Mohit Sharma are now in charge of managing the fund, which has an expense ratio of 0.67%.
The fund has 39.08% invested in AA-rated securities, lower than the category average of 54.94%, while its AAA-rated allocation stands at 16.55%, above the category average of 12.09%. It also has 15.19% invested in A and below-rated securities, nearly double the category average of 7.85%. The fund maintains 12.00% in cash equivalents, above the category average of 8.25%, while its sovereign (SOV) exposure of 9.85% is lower than the category average of 12.35%.
The fund has delivered a mean return of 12.50%, comfortably outperforming the credit risk category average of 9.49%, reflecting strong long-term return potential.
Top 5 holdings: GOI Sec, GMR Airports Ltd Bonds, National Bank For Agriculture & Rural Development SR 25G Bonds, Jubilant Bevco Ltd Debenture and Hinduja Leyland Finance Ltd Debenture.
Asset allocation: 80.92% in debt, 7.08% in real estate and 12% in Cash & Cash Eq.
Risk profile: The fund’s standard deviation of 2.99% is slightly higher than the category average of 2.40%, indicating moderately higher volatility than its peers. The fund’s Sharpe ratio of 2.24 exceeds the category average of 1.89, suggesting it has generated superior risk-adjusted returns, whereas the fund’s Sortino ratio of 8.56 is significantly higher than the category average of 5.30, indicating effective management of downside risk in terms of generating returns.
HSBC Credit Risk Fund – Direct Plan
Since its launch on January 1, 2013, it has produced returns of 8.22%. Shriram Ramanathan is now in charge of managing the fund, which has an expense ratio of 0.81%.
The fund has a 58.92% allocation to AA-rated securities, slightly above the category average of 54.94%. It also has a significantly higher exposure to AAA-rated securities (25.45%) compared with the category average of 12.09%. The fund’s sovereign (SOV) allocation stands at 10.65%, slightly below the category average of 12.35%, while its cash equivalent exposure of 4.58% is lower than the category average of 8.25%.
The fund has generated a mean return of 11.55%, outperforming the credit risk category average of 9.49%.
Top 5 holdings: GOI Sec, Aditya Birla Renewables Ltd Bonds/NCD, Power Grid Corporation of India Ltd Debenture, JTPM Metal Traders Ltd Debenture and Godrej Seeds & Genetics Ltd SR 2 STRPP NCD.
Asset allocation: 95.42% in debt and 4.58% in Cash & Cash Eq.
Risk profile: The fund’s standard deviation of 6.88% is significantly higher than the category average of 2.40%, suggesting it has experienced considerably higher volatility than its peers. The fund’s Sharpe ratio of 0.84 is well below the category average of 1.89, indicating relatively lower risk-adjusted returns, whereas the fund’s Sortino ratio of 8.42 is significantly higher than the category average of 5.30, reflecting effective management of downside risk.
Should you invest in debt funds amid the current interest rate cycle?
In the last year, the RBI has reduced the repo rate by 125 BPS from 6.50% in Feb 2025 to 5.25% by early 2026. However, in FY27, the RBI has maintained a status quo on rates across MPC meetings held in the year due to changing macroeconomic conditions driven by geopolitical uncertainties.
Currently, geopolitical uncertainties are beginning to ease, and RBI’s future policy decisions are likely to be driven by evolving domestic economic conditions, such as GDP growth estimates, inflation, and liquidity supply.
“Beyond interest rate risk, investors should consider evaluating risk parameters like credit risk and liquidity risk, which indicate underlying portfolio investment quality, like how easily the underlying securities can be sold during periods of market stress without significantly impacting prices,” said Subhendu Harichandan, Executive Director, Anand Rathi Wealth.
“So investors can consider investing in categories like liquid funds, ultra short-term funds, money market funds and target maturity funds which primarily invest in gilts, government securities and T-bills which hold negligible liquidity and credit risk,” Subhendu Harichandan further explained.
Further, investors can choose debt funds based on their investment tenure, liquidity needs, and risk profile.
If one is investing for short-term needs, like less than 3 to 6 months, liquid funds are more suitable for 6 months to 1 year, ultra-short-term funds, and beyond 1 year, target maturity funds are ideal to park the debt portion of the portfolio, says Subhendu Harichandan.
Additionally, if one is in a higher tax bracket for a long-term debt portion, they can consider investing in arbitrage funds as they are taxed under the head of equity gains and deliver more effective post-tax returns than debt funds.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.
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