My dad's friend called me last month from Mumbai. His NRE FD had matured, and the bank was offering only 6.5% on renewal.
"Beta, is there something better than FDs? But I don't want stock market tension at my age."
I've had this conversation hundreds of times with NRIs. You want safety. You want decent returns. But you also want flexibility FDs don't offer.
Debt mutual funds sit right in this sweet spot. They invest in bonds, government securities, and money market instruments. No wild swings like equity. Better liquidity than FDs. And historically, returns between 6-8% annually.
Here's my complete breakdown of the best debt mutual funds for NRIs in 2025.
What Makes Debt Mutual Funds Different from FDs?
Before comparing funds, let me explain why debt funds deserve attention.
Fixed deposits lock your money. Withdraw early, and you lose 1% interest plus pay a penalty. Debt funds let you exit whenever you want. Most funds have zero exit load after 7 days.
Debt funds invest across multiple issuers. Your NRE fixed deposit sits entirely with one bank. A good debt fund spreads money across 40-50 securities. If one issuer defaults, your portfolio doesn't collapse.
The interest rate environment matters here. When rates fall, bond prices rise. Debt funds can capture this capital appreciation. FDs just roll over at lower rates.
👉 Tip: Debt funds work best for investment horizons of 3 months to 3 years. For longer periods, consider GIFT City fixed deposits or equity-debt hybrid funds.
Understanding Different Debt Fund Categories
SEBI has defined 16 categories of debt funds. You don't need all of them.
Here's what actually matters for NRIs seeking stable returns:
Fund Category | Invests In | Ideal Holding Period | Risk Level |
|---|---|---|---|
Liquid Funds | Treasury bills, CDs maturing within 91 days | 7 days to 3 months | Very Low |
Overnight Funds | Securities maturing next business day | 1 day to 7 days | Lowest |
Ultra-Short Duration | Bonds with 3-6 month maturity | 3-6 months | Low |
Short Duration | Bonds with 1-3 year maturity | 1-3 years | Low-Moderate |
Banking & PSU | Bank and PSU bonds only | 1-3 years | Low |
Corporate Bond | AAA-rated corporate bonds | 2-3 years | Low-Moderate |
Gilt Funds | Government securities only | 3-5 years | Moderate |
Each category serves a specific purpose. Emergency funds should go into liquid funds. Surplus cash for 6-12 months fits ultra-short duration. Money you won't need for 2-3 years can earn more in corporate bond or banking & PSU funds.
Best Liquid Funds for Emergency Money
Liquid funds are the safest debt funds. They invest only in instruments maturing within 91 days. Your money is almost as accessible as a savings account, but earns 5.5-7% instead of 3-4%.
Here are the top performers with lowest risk:
Fund Name | AUM (₹ Cr) | 1Y Return | 3Y Return | Expense Ratio |
|---|---|---|---|---|
SBI Liquid Fund | 71,092 | 6.7% | 7.0% | 0.21% |
HDFC Liquid Fund | 70,413 | 7.1% | 7.1% | 0.20% |
Aditya Birla SL Liquid Fund | 56,938 | 6.8% | 7.1% | 0.21% |
ICICI Prudential Liquid Fund | 45,629 | 6.7% | 7.1% | 0.20% |
Axis Liquid Fund | 42,867 | 7.1% | 7.0% | 0.09% |
Source: Groww, INDmoney, November 2025
Why these funds stand out:
SBI Liquid Fund has the largest AUM at over ₹71,000 crores. This size matters. Larger funds can handle sudden redemption requests without selling securities at discounted prices.
Axis Liquid Fund charges just 0.09% expense ratio. That's the lowest among major liquid funds. Over a year, this 0.10% difference translates to ₹1,000 extra returns on every ₹10 lakhs invested.
HDFC and ICICI Prudential have delivered 7.1% over 3 years. Consistent performers across interest rate cycles.
👉 Tip: Park your UAE gratuity in liquid funds temporarily while deciding on long-term investments. You'll earn 6-7% instead of near-zero in a savings account.
Best Overnight Funds for Ultra-Safe Parking
Overnight funds invest in securities that mature the very next business day. Zero interest rate risk. Zero credit risk practically.
Returns are lower than liquid funds (around 5-5.5%), but safety is absolute.
Fund Name | AUM (₹ Cr) | 1Y Return | Expense Ratio |
|---|---|---|---|
SBI Overnight Fund | 21,498 | 6.78% | 0.15% |
ICICI Prudential Overnight Fund | 10,037 | 6.78% | 0.10% |
HDFC Overnight Fund | 9,578 | 6.7% | 0.10% |
Nippon India Overnight Fund | 8,500 | 6.7% | 0.08% |
Axis Overnight Fund | 7,200 | 6.7% | 0.09% |
Source: Smallcase, AliceBlue, December 2025
Overnight funds work when you need to park large sums for very short periods. Received property sale proceeds? Park in overnight fund while completing documentation for reinvestment under Section 54.
Best Banking & PSU Funds for Safety with Better Returns
Banking and PSU funds invest in bonds issued by banks and public sector companies. These borrowers have AAA credit ratings backed by government ownership.
The credit risk is minimal. Returns consistently beat liquid funds by 1-1.5% annually.
Fund Name | AUM (₹ Cr) | 3Y Return | 5Y Return | Expense Ratio |
|---|---|---|---|---|
ICICI Prudential Banking & PSU Debt | 9,227 | 8.02% | 6.80% | 0.32% |
Aditya Birla SL Banking & PSU Debt | 9,241 | 7.91% | 6.65% | 0.34% |
LIC MF Banking & PSU Fund | 1,884 | 7.96% | 6.08% | 0.30% |
HDFC Banking and PSU Debt | 5,901 | 7.96% | 6.43% | 0.39% |
UTI Banking & PSU Fund | 4,500 | 7.90% | 7.25% | 0.35% |
Source: Groww, 5Paisa, December 2025
My recommendation: ICICI Prudential Banking & PSU Debt Fund delivers the best risk-adjusted returns. 8.02% over 3 years with minimal credit risk. The fund has ₹9,227 crore AUM, ensuring excellent liquidity.
UTI Banking & PSU Fund shows the highest 5-year return at 7.25%. Consistent performer across market cycles.
👉 Tip: Banking & PSU funds are excellent for NRO account surplus funds. You earn better than FD rates while maintaining flexibility to repatriate when needed.
Best Corporate Bond Funds for Higher Returns
Corporate bond funds invest primarily in bonds issued by highly-rated companies. SEBI mandates at least 80% in AA+ or higher-rated bonds.
Returns typically beat banking & PSU funds by 0.5-1% annually. The trade-off is slightly higher credit risk.
Fund Name | AUM (₹ Cr) | 3Y Return | 5Y Return | Expense Ratio |
|---|---|---|---|---|
Franklin India Corporate Debt | 1,500 | 8.28% | 6.57% | 0.40% |
ICICI Prudential Corporate Bond | 25,000 | 7.9% | 6.6% | 0.35% |
Axis Corporate Bond Fund | 7,200 | 8.17% | 6.66% | 0.30% |
HDFC Corporate Bond Fund | 30,000 | 7.8% | 6.5% | 0.38% |
Kotak Corporate Bond Fund | 15,500 | 7.7% | 6.4% | 0.35% |
Source: Groww, December 2025
Franklin India Corporate Debt Fund leads with 8.28% three-year returns. The fund has recovered well after the 2020 crisis and now follows conservative credit practices.
Axis Corporate Bond Fund maintains the lowest expense ratio at 0.30% while delivering competitive returns. Good choice for cost-conscious investors.
ICICI Prudential Corporate Bond Fund manages the largest corpus at ₹25,000 crores. This scale provides excellent liquidity and negotiating power with bond issuers.
Best Gilt Funds for Zero Credit Risk
Gilt funds invest exclusively in government securities. The government backs these bonds. Credit risk is essentially zero.
But here's the catch. Gilt funds carry significant interest rate risk. When RBI raises rates, gilt fund NAVs fall. When rates drop, NAVs shoot up.
Fund Name | AUM (₹ Cr) | 3Y Return | 5Y Return | Expense Ratio |
|---|---|---|---|---|
ICICI Prudential Gilt Fund | 9,227 | 8.17% | 7.86% | 0.30% |
SBI Magnum Gilt Fund | 8,500 | 8.04% | 6.28% | 0.35% |
Baroda BNP Paribas Gilt Fund | 1,200 | 8.22% | 5.76% | 0.38% |
DSP Gilt Fund | 2,500 | 7.9% | 6.1% | 0.40% |
UTI Gilt Fund | 1,800 | 8.0% | 6.2% | 0.42% |
Source: Groww, Fincash, December 2025
ICICI Prudential Gilt Fund has delivered 7.86% over 5 years. Best in category. The fund manager actively adjusts portfolio duration based on rate expectations.
When to invest in gilt funds:
The RBI kept repo rates unchanged from April 2023 through most of 2024-25. With inflation moderating, rates may decline. A falling rate environment benefits gilt funds significantly.
I'd suggest allocating 10-20% of your debt portfolio to gilt funds if you have a 3-5 year horizon. You'll benefit when the rate cycle turns.
👉 Tip: For retirement planning, gilt funds provide government-backed safety with potential for better returns during rate cuts.
Best 10-Year Gilt Funds for Long-Term Safety
These specialized funds invest in government securities with 10-year maturity. Higher interest rate sensitivity means more volatility, but potentially higher returns.
Fund Name | 3Y Return | 5Y Return | Expense Ratio | YTM |
|---|---|---|---|---|
ICICI Prudential Constant Maturity Gilt | 8.95% | 5.98% | 0.23% | 6.91% |
SBI Magnum Constant Maturity Fund | 8.77% | 5.89% | 0.31% | 6.93% |
Bandhan G-Sec Constant Maturity Plan | 8.6% | 5.7% | 0.15% | 6.95% |
DSP 10Y G-Sec Fund | 8.6% | 5.12% | 0.31% | 6.86% |
Source: Angel One, December 2025
Bandhan G-Sec Constant Maturity Plan offers the lowest expense ratio at 0.15%. Combined with the highest YTM (yield to maturity) of 6.95%, it provides excellent value.
These funds suit investors who want government security exposure with longer duration. Ideal for safe investments forming the conservative portion of your portfolio.
Best Short Duration Funds for 1-3 Year Goals
Short duration funds invest in bonds with 1-3 year maturities. They balance return potential with moderate interest rate risk.
Fund Name | AUM (₹ Cr) | 3Y Return | 5Y Return | Expense Ratio |
|---|---|---|---|---|
HDFC Short Term Debt Fund | 15,000 | 8.05% | 6.52% | 0.38% |
ICICI Prudential Short Term Fund | 20,000 | 7.9% | 6.4% | 0.35% |
Axis Short Duration Fund | 8,500 | 7.8% | 6.3% | 0.32% |
Aditya Birla SL Short Term Fund | 7,200 | 7.7% | 6.2% | 0.35% |
Kotak Bond Short Term | 16,500 | 7.6% | 6.1% | 0.40% |
Source: Groww, Tickertape, December 2025
HDFC Short Term Debt Fund leads with 8.05% three-year returns. The fund maintains high credit quality while capturing yield opportunities.
Short duration funds work well for goals 1-3 years away. Planning to buy property in India? Accumulating down payment for a car? These funds offer better returns than FDs without excessive risk.
Best Ultra-Short Duration Funds for 3-6 Month Parking
Ultra-short duration funds sit between liquid and short duration. They invest in bonds maturing in 3-6 months.
Fund Name | AUM (₹ Cr) | 3Y Return | 5Y Return | Expense Ratio |
|---|---|---|---|---|
Tata Ultra Short Term Fund | 5,500 | 7.57% | 6.28% | 0.30% |
ICICI Prudential Ultra Short Term | 15,000 | 7.5% | 6.2% | 0.32% |
Aditya Birla SL Savings Fund | 16,349 | 7.4% | 6.1% | 0.34% |
Nippon India Ultra Short Duration | 7,695 | 7.3% | 6.0% | 0.38% |
Mirae Asset Ultra Short Duration | 1,616 | 7.3% | 5.9% | 0.22% |
Source: INDmoney, December 2025
Tata Ultra Short Term Fund delivers 7.57% over 3 years. Consistent performer with low volatility.
Mirae Asset Ultra Short Duration charges the lowest expense ratio at 0.22%. For cost-conscious NRIs, this matters.
👉 Tip: Use ultra-short duration funds to hold end-of-service benefits temporarily after returning to India. You earn 7%+ while deciding on long-term allocation.
How Debt Fund Taxation Works for NRIs (2025 Rules)
The taxation landscape changed significantly after April 2023. Here's what you need to know:
For investments made after April 1, 2023:
All gains are taxed at your income tax slab rate. There's no distinction between short-term and long-term. No indexation benefit.
If you're in the 30% tax bracket, your effective post-tax return on a 7% debt fund becomes 4.9%.
For investments made before April 1, 2023:
If held over 24 months, gains are taxed at 12.5% without indexation (post-July 2024 rule).
TDS for NRIs:
Here's where it gets complicated. NRIs face TDS (Tax Deducted at Source) on debt fund redemptions:
Type of Gain | TDS Rate |
|---|---|
Short-term capital gains | 30% + surcharge + cess |
Long-term capital gains | 20% + surcharge + cess |
Dividends | 20% (or DTAA rate, whichever is lower) |
This high TDS creates cash flow issues. You get back less money, then claim refunds through ITR filing.
DTAA Benefits:
If you're in UAE, the India-UAE DTAA may provide relief. Check your specific situation with a tax advisor.
👉 Tip: For UAE NRIs seeking tax-free returns, GIFT City USD fixed deposits often make more sense than debt funds. Returns are tax-free and there's no currency conversion hassle.
Debt Funds vs NRE/NRO FDs: Which Wins?
Let me break down the comparison honestly:
Parameter | Debt Mutual Funds | NRE FD | NRO FD |
|---|---|---|---|
Returns (typical) | 6-8% | 6-7.5% | 6-7.5% |
Tax on returns | Slab rate (post-2023) | Tax-free | Slab rate + TDS |
Liquidity | High (T+1 to T+3) | Low (penalty on break) | Low (penalty on break) |
Lock-in | None | 1-5 years typical | 1-5 years typical |
Credit risk | Low to moderate | Bank guarantee | Bank guarantee |
Currency risk | INR only | INR | INR |
Repatriation | Via NRE/NRO | Fully repatriable | Limited to $1M/year |
When FDs win:
NRE FDs offer tax-free returns in India. For UAE NRIs in the zero-tax environment, effective returns are often higher than debt funds after Indian taxation.
If you need guaranteed returns and can lock money for 1-5 years, FDs provide certainty.
When debt funds win:
You need flexibility. Debt funds let you add and withdraw money anytime.
You're in a lower tax bracket. If your total Indian income keeps you in 10-20% brackets, debt fund returns after tax may beat FDs.
You want diversification. Debt funds spread risk across multiple issuers.
Compare rates using our NRI FD Comparison Tool to see current bank offerings.
My Recommended Debt Fund Portfolio for NRIs
Based on my experience helping NRIs, here's how I'd structure a debt portfolio:
Conservative Portfolio (Minimal risk)
Allocation | Fund Category | Suggested Fund |
|---|---|---|
40% | Liquid Fund | SBI Liquid Fund |
30% | Banking & PSU | ICICI Prudential Banking & PSU Debt |
30% | Short Duration | HDFC Short Term Debt |
Expected return: 6.5-7.5% annually
Balanced Portfolio (Moderate risk)
Allocation | Fund Category | Suggested Fund |
|---|---|---|
20% | Liquid Fund | Axis Liquid Fund |
30% | Corporate Bond | Franklin India Corporate Debt |
30% | Banking & PSU | Aditya Birla SL Banking & PSU Debt |
20% | Gilt Fund | ICICI Prudential Gilt Fund |
Expected return: 7-8% annually
Growth-Oriented Portfolio (Higher risk)
Allocation | Fund Category | Suggested Fund |
|---|---|---|
10% | Liquid Fund | HDFC Liquid Fund |
30% | Corporate Bond | Axis Corporate Bond |
30% | Gilt Fund | ICICI Prudential Gilt Fund |
30% | 10-Year Gilt | Bandhan G-Sec Constant Maturity |
Expected return: 7.5-9% annually (with volatility)
👉 Tip: Start with the conservative portfolio if you're new to debt funds. Graduate to balanced as you get comfortable with NAV fluctuations.
Common Mistakes NRIs Make with Debt Funds
1. Chasing highest returns
That credit risk fund showing 12% returns? It's investing in lower-rated bonds. When one company defaults, you lose principal. Stick to funds with 80%+ AAA-rated holdings.
2. Ignoring expense ratios
A 0.5% higher expense ratio eats into your returns every year. Over 5 years on ₹10 lakhs, that's ₹25,000 less in your pocket.
3. Not checking fund house track record
The Franklin fiasco of 2020 reminded everyone that fund house practices matter. Stick with established AMCs: SBI, HDFC, ICICI Prudential, Axis, UTI.
4. Treating debt funds like FDs
Debt fund NAVs fluctuate. You may see negative returns for a month. That's normal. Don't panic-sell during short-term volatility.
5. Ignoring FATCA complications
US and Canada NRIs face restrictions on Indian mutual fund investments. Many AMCs don't accept investments from these countries. Verify compliance before investing. Check our Compliance Compass for guidance.
How to Invest in Debt Funds as an NRI
Step 1: Complete KYC
You'll need PAN card, passport, overseas address proof, and bank details (NRE/NRO). Many AMCs offer video KYC now. Check out our guide on mutual fund KYC for NRIs.
Step 2: Choose investment route
Direct plans have lower expense ratios (0.1-0.3% less than regular plans). Invest through AMC websites or platforms like Belong.
Step 3: Link NRE/NRO account
Investments through NRE accounts are fully repatriable. Through NRO accounts, there are annual limits on repatriation.
Step 4: Start small
Most funds accept ₹5,000 lump sum minimum. Start there. Get comfortable with the process before investing larger amounts.
Why GIFT City Investments May Beat Debt Funds for UAE NRIs
I'm often asked this question: "Should I invest in debt funds or GIFT City?"
For UAE NRIs specifically, GIFT City investments offer compelling advantages:
Tax-free returns: GIFT City products are exempt from Indian capital gains tax. No TDS complications.
USD denomination: Keep money in USD. No currency conversion. No INR depreciation risk eating your returns.
Competitive rates: GIFT City FDs currently offer 4.5-5% in USD. After accounting for expected rupee depreciation of 3-4% annually, effective INR returns can exceed 8%.
Simpler compliance: No Form 15CA/15CB for repatriation. No TDS refund claims.
Explore GIFT City mutual funds for equity exposure with similar tax benefits.
Key Takeaways
Debt mutual funds offer NRIs a flexible alternative to fixed deposits. Returns of 6-8% are achievable with low to moderate risk.
Liquid funds work for emergency money and short-term parking. Banking & PSU funds provide safety with better returns for 1-3 year horizons. Gilt funds suit longer-term investors willing to accept interest rate volatility.
Post-2023 taxation changes have made debt funds less attractive from a tax perspective. UAE NRIs may find GIFT City products more tax-efficient.
Start with conservative allocations. Build comfort with NAV fluctuations before increasing exposure.
Want help navigating debt fund choices? Join our WhatsApp community where NRIs discuss investment strategies daily. Or download the Belong app to explore tax-efficient alternatives designed specifically for global Indians.
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