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Debt funds are the mutual funds which invest in different types of fixed income instruments such as Government Bonds, Corporate Bonds, Money Market instruments, Treasury bills etc. They are recommended for short- to medium-term allocation, often as a substitute to bank fixed deposits. For such investments, safety of capital and regular income are an important objective.

 

Invest in debt mutual funds over traditional investments in Banks and FDs.

  • To get indexation benefit for investment held more than three years
  • To get superior returns as compared to fixed deposits
  • Safe investment for risk averse investors
  • To get portfolio allocation
  • High Liquidity & Suitable for investors in higher tax bracket
  • To avoid volatility and willing to adjust your growth expectations accordingly
  • To invest for regular income
  • To beat inflation

Make Debt Fund work for you

Systematic investment in debt mutual fund to achieve financial goals plays a major role at a time when fixed deposit rates are falling, Debt funds offered by mutual funds could be the best bet for the risk-averse investors to consider for fairly decent returns.

Interest income is combined with your income and taxed as per your slab. However, mutual fund investments are taxed only when you redeem them. There is no TDS. When you actually redeem your liquid fund units, you will be taxed for capital gains. Units held for under three years are liable for short-term capital gains tax as per your slab. Units held longer than three years are liable for Long Term Capital Gains tax at 20.6 per cent with indexation benefit. This makes liquid mutual fund investing more tax-efficient than FDs.

Inflation is a silent killer lurks in the midst of all our investments. When we invest our money in any instrument then we must keep in mind the safety, return, liquidity and most important is the inflation rate.

 

Let’s understand through example :-

Parameters

Fixed Deposits

Fixed Term Plan (With Indexation)

Investment Amount (A)

1,00,000.00

1,00,000.00

Return

6.20%

8.00%

Value after 3 years (B)

1,19,777

1,25,971

Index Cost (C)

-

120000

Tax Rate (D)

30.00%

20.00%

Taxable Gain (E)

(B-A)             19777.00

(B–C)                                 5971.00

Tax Amount (F = E*D%)

5933.10

1194.20

Post Tax Gains (G = B - F)

113843.90

124776.80

Post Tax Returns (CAGR%*)

4.42

7.66

In order to determine the gains from the sale of debt mutual fund units are classified as capital gains, which allows the investor to use indexation while computing tax on them. This is applicable on long-term capital gains on investments that have been held for 3 years and more.
Many investors are seriously considering parking money in debt mutual funds as banks have started
cutting rates on deposits. Hopes of a policy rate cut by the Reserve Bank of India are also contributing to the decision. However, most investors forget to include the most important factor in their calculations: indexation benefit.  Indexation helps investors in long-term debt funds to save taxes.
Indexation Benefit in Mutual Fund

For example if someone has invested a lumpsum amount of Rs 100000 in a debt mutual fund in the year 2013  and sold it for Rs 123373 since the investment was held for more than three years, it qualifies for long term capital gains taxes with indexation benefit and will get far more return as compare to traditional investment. 

 

Last Five Year Best Performing Debt Mutual Fund     

 Mutual Fund Scheme

6mth

1yr

2yr

3yr

5yr

L&T Flexi Bond - Regular (G) 

8.2

12.8

11.9

11.5

10.5

IDFC Dynamic Bond - Plan A (G) 

4.9

12.4

7.8

10.8

9.4

Kotak Bond (Deposit Plan) (G) 

8.2

11.5

11.3

10.7

10.1

DHFL Pramerica Dynamic Bond -Direct (G)

5.1

9.9

10.7

11

--

SBI Short Term Debt - Direct (G)

4

7.6

8.8

9

--

Tata Short Term Bond - Direct (G) 

4

7.6

8.7

9

--

UTI Short Term Income - IP (G) 

3.7

7.4

8.5

8.7

9.2

DSP Banking & PSU Debt-Dir (G)

4.2

7.1

8.9

9.1

--

ABSL Treasury Optimizer-Reg (G) 

4.2

6.7

9.3

9.4

9.9

DHFL Pramerica Short Maturity Fund-Direct

4.5

8.8

9.8

9.8

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