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From April 1, 2023, there will be no LTCG tax on debt funds. Simply put, gains from debt funds will now be taxed at the marginal rate of taxation i.e. income slab of investors irrespective of their holding period. Technically, there will be no LTCG and debt funds are now subject to only STCG.
While this seems like a big blow to the MF industry, debt funds still score over traditional fixed income funds in many ways. You can highlight these points to your clients to continue to sell debt funds over other fixed income products:
Tax benefits: Your clients can continue set off capital loss in equity stocks / equity MFs against gains made on debt funds. There is no such option available in traditional fixed income products.
Also, your clients can defer their tax payment till the time of redemption. They can avail this benefit in growth option of debt funds. However, in bank deposits, investors need to pay TDS on accrued interest irrespective of their redemption date.
Safety: While many banks in India are safe, even beyond the insurance cover of Rs 5 lakh per bank provided by DICGC, investors should avoid co-operative banks offering high interest rates on deposits.
Similarly, many categories of debt funds offer safety. Invest in funds with high credit quality that invest in G Sec, SDLs and AAA rated instruments.
Liquidity: Both debt MFs and bank deposits are liquid. However, debt funds have a slight advantage here. Apart from a few funds with exit load in the initial period, your clients can redeem their investments at the prevailing NAV.
Banks levy premature withdrawal penalty in most cases. Moreover, when your clients withdraw their money prior to its maturity, banks will apply different interest rate which are less than the offered interest rate.
Returns: This is a tricky comparison. Bank deposits have a pre-defined rate. However, debt funds are subject to volatility. Also, fund houses and MFDs cannot indicate returns to investors.
However, the portfolio YTM (yield to maturity) and TER (expenses) are publicly available data. The net-of-expenses YTM gives a ballpark idea on expected return over a particular time frame. The visibility of returns is even better in funds with a defined maturity e.g. Target Maturity Funds (TMFs).
Interestingly, fund YTMs have moved up over the last couple of years. Currently, in the funds with relatively lower TER, the net-of-expenses YTMs are better than the deposit rates of leading banks.
Debtguru Joydeep Sen is a corporate trainer and author. The views expressed in this article are those of the author and do not reflect the views of Cafemutual
