Debt funds or Bank Fixed Deposits

Debts funds are giving better options to invest as compared to bank or corporate fixed deposits mainly because of four reasons:

1.     Tax effective:

Rs. 1 Lac invested 2 years before @ 9% p.a. gives 1,18,810 that comes Rs. 18,810 as income. Let's see how it gets taxed.

FIXED DEPOSIT

DEBT FUND

Tax Payable

Yearly

At withdrawals

At withdrawals

Tax Rate*

30.90%

(As per slab)

10.30%

(Flat)

20.60%

(With indexation)

Tax outflow

9,250

1,937

Nil

Post Tax Returns

6.50%

8.45%

9.00%

* Assuming tax rate of 30.90%

Indexation raises cost to Rs. 1.20 Lacs, thus reducing net gain to loss. Hence, no tax liability.

2.     High liquidity

No locking up of funds.

No prepayment penalty by way of reduction in interest rate

0 to 1.25% exit load may be charged that too for exit before 6-9 months.

Instant money within 1-3 days of withdrawal

3.     Flexibility

Investment can be any amount. No limits

Investment can be made at any frequency. It can be twice in a day or it can be once in two years.

4.     High on returns

In a favorable interest rate cycle, debt funds have given great returns. Although it does not assure about future returns.

Can Robecco Short Term              9.54%

UTI Short Term                                 10.06%

HDFC ST Opportunities Fund       10.02%

Principal Income Fund                   10.79%

Birla Dynamic Bond:                        9.51%

SBI Dynamic Bond                            10.23%

SBI Income                                         11.43%

Reliance Dynamic Bond                 11.24%

Birla Medium Term                         10.97%

When to use debt fund:

1.       When you want to avoid high tax burden.

2.       When you are saving for short term objective or goal.

3.       When you want to invest in equity but can't judge when to start.

CA. Chetan V. Oswal

F.C.A., Certified Financial Planner

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