Best Debt Funds in 2025: Liquid, Money Market or Gilt - Where to invest?

Indian debt markets are sending mixed signals. Government bond yields are creeping up, inflation is cooling, and fund performances are diverging. For retail investors, the big question is: which debt fund category makes the most sense right now?

 

The yield on the benchmark 10-year Government Security (G-Sec) rose marginally to 6.40%, up from 6.38% at the end of July. The uptick was driven by concerns over fiscal slippage following proposed GST cuts, which raised fears of increased borrowing. However, the pressure was partly offset by S&P Global’s upgrade of India’s sovereign rating to BBB from BBB-, lending support to investor sentiment, as per the Edelweiss Mutual Fund report titled Curve - Yields, Scales, Liquidity & more..

 

 

Higher yields = lower bond prices, which can hurt long-duration funds like gilt funds.

Bond Market Snapshot

 

10-year G-Sec yield has inched up to 6.40% (from 6.38% in July).

 

State Development Loans (SDLs) now trade at a 52 bps spread over G-Secs, reflecting fiscal stress.

 

Inflation dropped to 1.55% in July, easing pressure on rates.

 

Global cues are supportive: U.S. Treasury yields have softened, and oil prices have fallen.  Fund performance 

 

In the money market, systemic liquidity remained in surplus at ₹3.32 lakh crore, though short-term borrowing costs nudged higher, with yields on commercial papers (CPs) and certificates of deposit (CDs) rising by 2–15 basis points across maturities.

 

State Development Loans (SDLs) also reflected fiscal stress, with the average spread between 10-year SDLs and 10-year G-Secs widening to 52 bps from 48 bps a month earlier.

 

On the corporate side, yields on AAA-rated PSU bonds softened in the short- to medium-term segment over the past three months, but edged higher at the longer end. Primary issuances remained active, with large borrowers such as Power Grid (₹14,000 crore, 6.66%) and GMR Airports (₹11,851 crore, 6.66%) tapping the market.

 

For mutual fund investors, performance diverged across categories. While liquid funds delivered an annualised return of 7.08% and money market funds about 8.06%, gilt funds suffered losses (-16.28% over one week, -11.79% over one month) as long-duration bonds sold off. 

Shorter-duration funds (liquid, money market, short duration) are faring better.

 

Globally, the U.S. 10-year Treasury yield eased to 4.33%, raising hopes of a Fed rate cut, while falling crude prices provided relief on the inflation front. India’s consumer inflation moderated to 1.55% in July 2025, its lowest in over a year.

 

For retail investors, the data underlines the importance of balancing safety and returns. Short-term categories like liquid and money market funds remain resilient amid rate uncertainty, while target maturity funds and Bharat Bond ETFs (yielding 6.65–6.90%) provide predictability for medium-term horizons.

 

Financial planners advise debt investors to stay diversified across duration buckets and avoid concentration risk, especially as fiscal pressures and global monetary shifts keep interest rate trajectories uncertain.  What should investors do?  

Shorter-duration funds (liquid, money market, short duration) are faring better.

Gilt funds have been volatile, losing value in recent weeks as long-term yields rose.

 

What Should Investors Do?

 

 If you want safety & liquidity

Stick with Liquid Funds or Money Market Funds. They are less sensitive to interest rate swings and work well for emergency or short-term parking of money.

 

 If you have a 2–5 year horizon

Look at Short Duration Funds or Target Maturity Funds/ETFs (like Bharat Bond ETFs yielding 6.6–6.9%). These give predictable income with relatively low risk.

 

 Be cautious with Gilt Funds

They are highly sensitive to interest rate movements. Unless you’re betting on rate cuts, gilt funds can be volatile.

 

Key Takeaway for 2025

 

Short-term funds = stability + decent returns

 

Target maturity ETFs = predictable income for medium-term goals

 

Gilt funds = avoid for now unless you are a long-term investor with high risk tolerance

 

Rule of thumb: Match your fund type to your time horizon. Don’t chase returns blindly—focus on safety, liquidity, and alignment with your goals.