Very few investors put their money in debt mutual funds which offer several advantages. Let’s have a look on why these funds make a better investment option in terms of fixed income.
- More liquidity than the fixed deposits-
Debt funds are very liquid. They offer you an option of withdrawing the amount invested anytime & also your money is transferred the very next day in to your account. Also you have the option of partial withdrawal without affecting the entire investments.
- They are more tax efficient-
Than the fixed deposits debts funds are more tax efficient, in long term. A debt fund income after one year investment is treated as long term capital gain & taxed at 10% or 20% indexation. The indexation benefit depends on how long you hold the debt fund. The longer you hold the more benefit you get. No TDS is deducted in this fund whereas in fixed deposits if income exceeds more than 10000 per year, the bank will deduct TDS. Fixed deposit incomes are taxed on annual basis whereas till the investor redeems the units in debt funds the tax is deferred indefinitely.
- You don’t lose even a day’s growth-
You don’t lose even a day’s growth when you invest in an open ended debt fund. But, when you invest in an open ended fixed deposit or a close ended fixed maturity plan, you get a lump sum amount at the end of the term. In debt fund, investments never stop growing till you redeem it whereas in fixed deposits your busy schedule affects the overall returns.
- Your returns can be higher-
If compared to those of other options such as bonds and fixed deposits, the tax returns from debt funds are higher. Also when there are changes in interest rates the debt funds give higher returns. The investor gains from the accrued interest on the bonds in the portfolio as the debt fund returns are associated with the current fixed deposit returns. If the return on investment declines then value of the bond in the portfolio shoots up which leads to capital gain for the investor.
- Great flexibility-
Debts funds compared to bonds and fixed deposits are far more flexible. You cannot imagine opening a fixed deposit every time if you have savings of up to 3000-4000 instead you can invest small amounts every month through SIP. You can also withdraw a sum from your investment every month & this is usually for retired individuals who need a fixed income every month. Also in debt funds you can shift the money to an equity fund or any other scheme of your choice from the same fund house.
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Mutual fund investments are subject to market risks. Read the scheme related documents carefully.