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Nivesh Jaagran Why debt funds hold an edge over bank FDs

Why debt funds hold an edge over bank FDs

Debt funds are more tax efficient than bank FDs.
Team Cafemutual Jul 31, 2018

In the last few years, there has been increased awareness about financial planning and asset allocation. Investors are slowly realizing the importance of having a balanced portfolio containing both equity and debt. However, when it comes to debt investments people veer towards traditional instruments like bank FDs and RDs. Lack of knowledge about other debt investment options and safety associated with bank products are the main factors contributing to their popularity.

Ideally, investors should maintain their household and day to day expenses through bank account and debt allocation through debt funds such as liquid funds, FMPs and income funds.

Cafemutual has created a table comparing the two. You can share this table with your clients to help them understand the pros and cons of both these products. 

Feature

Debt funds

Bank Deposits

Liquidity

High

Moderately high

Risk

Low to moderate

Low

Penalty for early withdrawal

Levy of exit load is dependent on type of fund

Yes

Interim income

Yes, through dividend. Dividends are taxed at source at 28.84%

Investors can choose monthly/quarterly or half yearly interest options.

Tax benefit

Yes, indexation benefit on LTCG

No

Ease of investment

Yes

Yes

Investment method

Both lumpsum and periodic via SIP

Lumpsum in FDs and Periodic in RDs

Safety

Value of the investment is linked to market

Holding up to Rs. 1 lakh is protected by Deposit Insurance and Credit Guarantee Corporation

 

Along with the flexibility, debt funds offer superior tax efficient returns. Depending on their risk appetite, investors can invest in broadly three buckets of mutual funds.

For short-term needs, investors can consider liquid or money market funds as returns of these funds are closer to savings account and suitable for investors having low risk appetite.

If the investor is comfortable with slightly higher level of risk then they can invest in short to medium duration funds and corporate bond fund. They have potential to generate slightly higher returns compared to FDs but they see a moderate fall in their value with a rise in interest rates.

Long duration funds and credit risk funds have a potential to generate substantially higher returns. Long duration funds tend to deliver high returns in falling interest rate scenarios. Rise in interest rates is the primary risk affecting these funds. These funds can even deliver negative returns in case of sudden interest rate hikes. As credit risk funds invest in lower rated instruments, default is the primary risk affecting these funds. These funds are suitable for investors with moderately high risk appetite.

   

 

 

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