Top Performing Debt Mutual Funds 2025: 1-Year Returns from 10% to 24%

Investors usually turn to debt mutual funds for safety, stability, and steady income. Unlike equity funds, debt mutual funds primarily invest in government securities, corporate bonds, treasury bills, and money market instruments. Traditionally, these funds offer moderate returns in the range of 6% to 9%. However, the year 2025 has been an exception. Several debt mutual funds surprised investors with extraordinary gains, delivering returns as high as 24% in just one year.

In this article, we will discuss how debt funds work, why 2025 turned out to be a golden year for some categories, and provide a detailed look at the top 10 debt mutual funds that delivered outstanding one-year performance.

What are Debt Mutual Funds?

Debt mutual funds are schemes that pool money from investors and allocate it into fixed-income instruments such as bonds, debentures, and government securities. These funds are managed by professional fund managers who adjust the portfolio depending on interest rate trends, credit quality, and market conditions.

The key objective is to provide predictable income with relatively lower volatility compared to equity. While debt funds are generally considered safer, funds that invest in lower-rated corporate bonds can deliver higher returns but with additional risk.

Why 2025 Became a Strong Year for Debt Funds

The performance of debt mutual funds in 2025 has been far beyond expectations. There are a few reasons behind this:

1. Falling interest rates in early 2025 created opportunities in medium-duration funds.
2. Credit risk funds benefited from improving corporate balance sheets and reduced default risks.
3. Higher inflows from conservative investors seeking alternatives to fixed deposits pushed fund NAVs upward.

Together, these factors helped many debt schemes deliver double-digit annual returns, with some even crossing the 20% mark.

Top 10 Debt Mutual Funds with 10% to 24% Returns in Last 1 Year

Here is the list of the best-performing debt funds based on one-year returns as of August 2025.

Rank	Mutual Fund Scheme	1-Year Return (%)
1	DSP Credit Risk Fund	22.93
2	HSBC Credit Risk Fund	21.68
3	Aditya Birla Sun Life Credit Risk Fund	17.40
4	Aditya Birla Sun Life Medium Term Plan	13.81
5	Franklin India Income Plus Arbitrage Active FoF	13.80
6	Nippon India Medium Duration Fund	11.00
7	Invesco India Credit Risk Fund	10.72
8	Nippon India Credit Risk Fund	10.34
9	Franklin India Corporate Debt Fund	10.21
10	Bank of India Short Term Income Fund	10.13

Deep Dive into the Best Performers

DSP Credit Risk Fund

The DSP Credit Risk Fund has been the star performer, clocking nearly 23% returns in one year. By investing in lower-rated but high-yielding corporate bonds, it managed to generate alpha when credit conditions improved. However, investors must note the higher risks associated with such funds.

HSBC Credit Risk Fund

Another strong player in the credit risk category, this fund delivered over 21% returns. The scheme focused on carefully selected corporate debt instruments, benefiting from both interest rate movements and improved credit ratings of underlying securities.

Aditya Birla Sun Life Credit Risk Fund

With 17.4% returns, this fund proved to be a rewarding option for investors who sought above-average performance from debt. By balancing between mid-rated corporate papers and government securities, the fund reduced some risk while maintaining growth.

Aditya Birla Sun Life Medium Term Plan

This fund delivered close to 14% in one year. It invested in medium-duration instruments, which benefited from interest rate softening. The scheme is suitable for investors looking for steady income with moderate risk.

Franklin India Income Plus Arbitrage Active FoF

Franklin India Income Plus Arbitrage Active FoF surprised investors with 13.8% returns. By combining arbitrage strategies with debt allocation, it offered consistent growth, making it an attractive pick for conservative investors.

Nippon India Medium Duration Fund

This fund generated 11% returns in one year. It focused on medium-term bonds and was ideal for investors who preferred a 3–4 year holding horizon. Though moderate in performance compared to credit risk funds, it came with relatively lower risk.

Invesco India Credit Risk Fund

Delivering 10.7% returns, this scheme highlighted the potential of credit opportunities. It carried higher risks but rewarded investors who were willing to accept volatility for better gains.

Nippon India Credit Risk Fund

At 10.3% returns, this fund added itself to the outperformer list by investing in selective corporate bonds. While not as high as the top two performers, it still did better than traditional fixed-income options.

Franklin India Corporate Debt Fund

This scheme generated 10.2% returns by focusing on high-quality corporate debt papers. Compared to credit risk funds, it offered more stability, making it suitable for conservative investors.

Bank of India Short Term Income Fund

With 10.1% returns, this fund proved that even short-term debt funds can deliver double-digit growth during favorable conditions. Its strategy of investing in short-term papers helped reduce risk while ensuring attractive gains.

Who Should Invest in Debt Mutual Funds?

Debt funds are suitable for different types of investors depending on the category they choose:

• Conservative investors can prefer corporate debt funds or short-term funds for stability.
• Moderate risk takers can look at medium-duration funds.
• Aggressive debt investors can explore credit risk funds for higher yields.

Investors must remember that while returns in 2025 have been extraordinary, such high performance may not sustain every year. A balanced approach with risk assessment is crucial before investing.

Risks to Keep in Mind

Although debt mutual funds are safer than equity, they are not risk-free. Key risks include:

1. Credit Risk – Possibility of default or downgrade in corporate bonds.
2. Interest Rate Risk – Fluctuations in bond yields affect fund NAV.
3. Liquidity Risk – Some funds may face redemption pressure in volatile markets.

Understanding these risks before investing can help avoid surprises.

Conclusion

The year 2025 has turned out to be remarkable for debt mutual funds, especially for credit risk and medium-duration categories. With returns ranging from 10% to as high as 24%, these schemes have beaten expectations and delivered far more than traditional fixed-income instruments.

However, investors must stay cautious and align their investment decisions with risk appetite and time horizon. For stability, corporate debt or short-term funds are safer bets, while those aiming for higher returns can look at credit risk funds. Debt mutual funds may not always deliver such high numbers, but with proper planning, they can play a vital role in balancing portfolios and generating consistent wealth.