Best Debt Mutual Funds in 2026 for Stable and Safe Returns

Did you know that debt mutual funds now hold over Rs 12 lakh crore in India, with 40% of total mutual fund AUM? Yes, it is true, even conservative investors are ditching FDs for the best debt mutual funds that are giving 7%-8% stable returns with lower risks. Now, it is your turn to grow with these fixed-income securities in 2026.

So invest in the top debt funds in India that include names like Axis Liquid Fund, Axis Strategic Bond Fund, ICICI Pru Savings Fund, SBI Magnum Income Fund, Nippon India Low Duration, Nippon India Corp Bond Fund, etc, that are suitable for both your short and long-term goals.

Want to know about these funds in detail? Dive into this post that will list the best debt funds in India in 2026 and their short and long-term returns for you to decide which debt mutual fund is the best pick for your stable and safe returns in 2026.

Understanding Debt Mutual Funds and Their Types

Debt mutual funds or Fixed-Income Funds are the mutual fund schemes that primarily invest in fixed-income securities. These securities can also be called debt instruments or securities, which include government bonds, corporate bonds and other money market instruments.

These mutual funds are highly suitable for conservative investors who have short to medium-term investment goals, as they provide diversification, liquidity, stable returns and less risk as compared to equity mutual funds.

These funds can be a safer alternative to fixed deposits (FDs), though their net asset value (NAV) can fluctuate with interest rate changes, because the fund's returns are mainly generated from the interest earned on these investments and profits from trading.

The following are the main types of debt mutual funds:

• Liquid Funds- These mutual funds invest in securities with a maturity of less than 91 days, offering liquidity and lower risks.
• Corporate Bond Funds- These funds invest at least 80% assets in high-rated corporate bonds for safety and consistent growth.
• Credit Risk Funds- They invest at least 60% of assets in low-rated corporate bonds that have a high credit risk.
• Gilt Funds-These funds place their investments only in government securities with very low credit risk.
• Dynamic Bond Funds-In these funds, the fund managers dynamically mix the portfolio according to the interest rate changes.
• Floater Funds- These funds contribute to the floating-rate bonds, which adjust their interest rates based on market conditions.

Now, let us explore the best debt mutual funds that are ideal for long-term investments.

List of Best Debt Mutual Funds for Long Term Investments in 2026

Here is the list of the top 5 best debt funds that are suitable for your long-term investments in 2026, based on the 3-year and 5-year average returns: 

Pro Tip: Use a Mutual Fund Screener to filter and compare mutual funds for investments.

Next, let us uncover the best debt mutual funds for short-term investments.

List of Best Short Term Debt Funds in 2026

The following are the top 5 debt mutual funds listed based on their 3-year and 5-year returns that are best for your short-term investments in 2026:

Must Read: Top 10 Mutual Funds for SIP in 2025: Best Picks to Grow Wealth

Now, let us explore the benefits of investing in debt mutual funds.

Benefits of Investing in Debt Mutual Funds

Mentioned below are the benefits an investor can get by investing in the best debt mutual funds:

• Lower Volatility and Risk

The fixed-income securities, debt funds invest in are less volatile and risky than equities.

• Stable, Consistent Returns

The returns generated come primarily from the interest on the securities, providing a more stable and predictable income.

• High Liquidity

Liquid funds and many other debt funds offer high liquidity and allow investors to withdraw their money quickly.

• Management

Your investments in debt funds are managed by their skilled fund managers, who make the decisions for you and ensure that you get maximum growth.

• Better Returns Than Fixed Deposits

Some of the debt mutual funds have offered higher returns previously compared to the FDs, for specific time horizons.

• Diversification

Debt funds allow portfolio diversification across various asset classes and mitigate overall risks by spreading them.

• Investment Flexibility

Investors are allowed to start investing with low amounts via the Best SIP plans or invest a large amount in one go via a lump sum, depending on their financial capacity.

Pro Tip: Use a SIP Calculator and estimate the future returns of your SIP investment easily.

In the next heading, let us understand how to choose the best debt mutual fund for your 2026 investment.

How to Choose the Best Debt Mutual Fund?

Here is the process of choosing the best debt mutual fund in 2026:

Step 1: Understand your risk profile and investment horizon

• For short-term (6 months) goals, you can choose liquid funds.
• For the medium-term (6 months - 3 years) horizon, ultra-short duration, low duration or short duration funds are good.
• For long-term (3 years or more) objectives, you can explore dynamic bond or gilt funds.
• Debt mutual funds carry mainly two risks- credit risk and interest rate risk.

Step 2: Analyse the mutual fund's metrics before choosing one, including:

• Portfolio's fact sheet, track record and credit quality.
• Modified duration and YTM (Yield to Maturity) of the fund.
• Evaluate the expense ratio of the selected mutual fund.
• Fund manager's track record and track record's consistency.

Step 3: Diversify your holdings across different types of debt funds, as it is the main factor for mitigating the risk involved in your investments.

Now, let us look at the things to consider while investing.

Things to Consider While Investing in Debt Mutual Funds

The following are the things to consider while placing your investments in the best debt mutual funds:

• Align the selected fund with your investment horizon and risk tolerance.
• Know the risks involved in the mutual fund, like interest rate risk, credit risk and concentration risk.
• Analyse the key performance metrics and costs of the fund, including credit quality, YTM, expense ratio, liquidity and exit load.
• Consider the interest rate cycle, whether the interest rates are falling or rising.
• Do not always chase higher returns, as it may involve higher credit or duration risk as well.

Also Read: Top 5 Mutual Funds for Lumpsum Investment 2026: Expert Picks

Taxes Imposed on Debt Mutual Funds

Here are the tax rates that are imposed on the debt mutual funds in India:

For investments placed on or after April 1, 2023

If you buy debt fund units after April 1, 2023, any gains you make will be taxed based on your income tax rate, regardless of how long you hold them. There is no difference between short-term and long-term gains.

For investments made before April 1, 2023

The tax rates for the gains of the debt mutual funds made before April 1, 2023, are imposed based on the old tax rules and depend on the holding period.

Old Tax Rules are:

• If you sell fund units after July 23, 2024, any short-term capital gains (from holding for less than 24 months) will be added to your income & taxed based on your income tax rate. If you hold fund units for more than 24 months, long-term gains will be taxed at a rate of 12.5%, without any indexation benefits.
• If you sell investments before July 23, 2024 and bought them before April 1, 2023, the tax on short-term gains (if held for 36 months or less) depends on your income tax slab. For long-term gains (if held for more than 36 months), the tax rate is 20% and you can benefit from indexation.

Taxation of dividends

If you receive dividends from debt mutual funds, they are added to your total income. You will then pay tax on this income based on your individual income tax slab rate.

Lastly, let us know who should invest in debt funds for 2026.

Who Should Invest in Debt Mutual Funds?

These are the investor profiles that are best suitable for investing in debt mutual funds in 2026:

• Conservative investors who prefer safety over high returns.
• Investors with short-term or medium-term goals.
• Individuals who require a regular and stable income stream.
• People who are seeking diversification with debt funds.
• Beginners who are new to the mutual fund industry & are hesitant to invest in the stock market.
• An investor whose goal is liquidity with better returns.

Conclusion

In short, debt mutual funds are the smart pick for investors who want to generate stable and better returns than the traditional investments of fixed deposits (FDs) in 2026. These mutual funds provide you with lower risks than equities.

Whether you are a beginner or an experienced player, the best debt mutual funds in 2026, including Axis Liquid Fund, ICICI Pru Savings Fund, Nippon India Low Duration, etc, for short-term and Axis Strategic Bond Fund, SBI Magnum Income Fund, Nippon India Corp Bond Fund, etc, for long-term, are the best pick to grow your wealth with safety.

Related Blogs:

1.    Top 5 Liquid Funds in India 2025: For Safe & Instant Returns

2.   Best Small Cap Mutual Funds for Long Term Investment in 2025

FAQs

1.Which debt funds beat fixed deposits in 2026?

Debt funds like ICICI Pru Gilt Fund, HDFC Gilt Fund and DSP CRISIL-IBX Gilt Plus SDL Fund often beat FDs.

2.What are the risks in debt mutual funds?

The main risks involved in debt mutual funds are interest rate risk, credit risk and liquidity risk.

3.How are debt mutual funds taxed in India for 2026?

Gains of purchase after April 2023 are taxed according to your slabs and gains bought before April 2023 and sold after July 2024 are taxed based on tax slabs for STCG and 12.5% for LTCG.

4.Should you invest in debt mutual funds in 2026?

The profiles suitable for these funds are conservative investors, short/medium-goal seekers, who want stable income, beginners, etc.

5.Debt funds vs FDs, which gives safe returns in 2026?

Debt mutual funds win on liquidity, higher post-tax returns and diversification, but FDs guarantee capital.