Source : PersonalFn
The Equity markets (Sensex) have been witnessing swings everyday. In such uncertain times, you are looking for safety of your capital.
When it comes to safety, the most common investment instrument that comes to our mind is the good old bank fixed deposit.
There is no doubt that bank fixed deposits give assured returns. They are offering as high as 10% now.
But the catch is that they eat away a large chunk of the interest that you earn in the form of tax.
An investor has to pay 30% tax (add to it the cess of 3%)on the interest earned on a bank deposit. This translates to a net return of a less than 7%...
While you might think that there is no better investment instrument than a bank fixed deposit, I would like state the contrary.
There is an instrument which can provide you returns higher than a bank fixed deposit with considerable safety.
The instrument is known as a Debt Mutual Fund.
Today, it is a great time to invest in Debt Mutual Funds, specially if you are in the highest tax bracket.
While there is no doubt that Bank Fixed Deposits come with the highest safety, the biggest disadvantage is that you have to pay upto 30.6% income tax on the interest that you will earn.
Instead, if you were to invest in debt instruments that I am talking about then your tax payout would be only 10%.
This strategy gives you better returns (more than Fixed Deposits) and without taking higher risk such as you do in equities or stocks.
So, you see when you invest in Debt Mutual Funds, you get:
- Higher returns
- Low tax outgo
- No exposing your investments to stocks and equities.
Isn't that a deadly combination?
So go ahead and invest in Debt Mutual Funds.
But beware; There are so many funds out there in the market.
Debt Funds: Confusion prevails!
Debt Fund Category | No of Schemes |
Liquid Funds | 52 |
Ultra Short Term (Liquid Plus) | 46 |
Floating Rate Fund - Short Term | 19 |
Floating Rate Fund - Medium / Long Term | 11 |
G-Sec Fund - Short Term | 15 |
G-Sec Fund - Medium / Long Term | 29 |
Income Fund - Short Term | 32 |
Income Fund - Medium / Long Term | 58 |
Monthly Income Plans | 46 |
And a majority of them are worthless! Just plain copies of each other!
It may also happen that the scheme that you choose, may not actually meet your investment objective, or you may fail to come across the right fund that can help you earn better tax adjusted returns.
Choice of wrong funds can seriously hamper your portfolio. And in its quest to seek the highest returns it may end up investing in low quality, high risk instruments.
And that is not what you want?
Before choosing a debt fund, you need to keep in mind that:
Interest rate scenario plays an important part of investing in debt mutual funds. The changes in interest rates are dependent on numerous factors like liquidity and supply conditions, inflation, fiscal deficit, government borrowing plans etc.
You need to understand, where the interest rates are heading, and which debt fund you should choose to invest your money based on the prevailing interest rate conditions.
