Why Are Debt Mutual Funds A Better Alternative To FDs?

Nutan Gupta

17 Apr 2017

New Page 1

A Debt Fund is a mutual fund which invests in fixed income securities. Fixed income securities include government bonds, certificate of deposit, commercial papers, treasury bills and corporate bonds. Investors with a low-risk appetite consider investing in debt mutual funds and fixed deposits (FDs). In one of our articles earlier, we had discussed the different types of debt mutual funds. This article will tell you why investing in debt mutual funds should be considered over FD.

Safety of capital is same

The safety of any instrument depends on the credit rating of the instrument. Fixed deposits with a AAA rating implies that it carries the highest level of safety. Debt mutual funds are not rated by themselves but their safety can be identified from the portfolio they invest in. While sovereign rating indicates the highest level of safety as it is issued by the Government of India, AAA and AA rating also indicate a high level of safety as the funds are issued by banks, public sector companies and private companies. Moreover, Securities Exchange Board of India (SEBI) being the regulator, keeps a close watch on the fund industry.

Debt funds provide higher returns

Fixed deposits provide fixed returns. At present, the interest rate provided by FDs is 6.5%. If one looks at the historical performance of debt mutual funds, it has given returns of 8-9%. Interest rate fluctuations can cause volatility in debt fund, otherwise they are very safe investments.

Taxation

The returns from fixed deposits are considered as interest income and hence are added to an individual’s normal income. An individual whose income comes in the tax bracket of 30%, tax takes away a large chunk of his returns. The tax rate is same for debt funds held for less than 36 months. However, if debt funds are held for more than 36 months, long term capital gain is applied and the returns are taxed at 20% with indexation.

Debt funds provide better liquidity

The proceeds of open-ended debt funds are credited to an individual’s bank account in 2-3 days. Although fixed deposits can also be liquidated in 2-3 days, there is a penalty for withdrawing FDs before the maturity date. Some debt funds may charge you exit load which is usually 0.25% if you withdraw within a certain period of time.

For example:

Mr. Shah has invested Rs. 1 lakh each in a Bank FD and Debt Fund for a period of 3 years and 1 day. The expected return for both these investments is 7.5%. Which investment will give him a better post-tax return?

Investment in FD

Investment in Debt Fund

Amount with interest/return

Rs. 1,24,230

Rs. 1,24,230

Index Cost

NA

Rs. 1,15,763

Tax Applicable Rate

30% (Higher Tax Slab)

20%

Taxable Gain

Rs. 24,230

Rs. 8,467

Tax Payable

Rs. 7,269

Rs. 1,693

Net Return (p.a.)

5.40%

7.00%

Have Referral Code?

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Why Are Debt Mutual Funds A Better Alternative To FDs?

Nutan Gupta

17 Apr 2017

New Page 1

A Debt Fund is a mutual fund which invests in fixed income securities. Fixed income securities include government bonds, certificate of deposit, commercial papers, treasury bills and corporate bonds. Investors with a low-risk appetite consider investing in debt mutual funds and fixed deposits (FDs). In one of our articles earlier, we had discussed the different types of debt mutual funds. This article will tell you why investing in debt mutual funds should be considered over FD.

Safety of capital is same

The safety of any instrument depends on the credit rating of the instrument. Fixed deposits with a AAA rating implies that it carries the highest level of safety. Debt mutual funds are not rated by themselves but their safety can be identified from the portfolio they invest in. While sovereign rating indicates the highest level of safety as it is issued by the Government of India, AAA and AA rating also indicate a high level of safety as the funds are issued by banks, public sector companies and private companies. Moreover, Securities Exchange Board of India (SEBI) being the regulator, keeps a close watch on the fund industry.

Debt funds provide higher returns

Fixed deposits provide fixed returns. At present, the interest rate provided by FDs is 6.5%. If one looks at the historical performance of debt mutual funds, it has given returns of 8-9%. Interest rate fluctuations can cause volatility in debt fund, otherwise they are very safe investments.

Taxation

The returns from fixed deposits are considered as interest income and hence are added to an individual’s normal income. An individual whose income comes in the tax bracket of 30%, tax takes away a large chunk of his returns. The tax rate is same for debt funds held for less than 36 months. However, if debt funds are held for more than 36 months, long term capital gain is applied and the returns are taxed at 20% with indexation.

Debt funds provide better liquidity

The proceeds of open-ended debt funds are credited to an individual’s bank account in 2-3 days. Although fixed deposits can also be liquidated in 2-3 days, there is a penalty for withdrawing FDs before the maturity date. Some debt funds may charge you exit load which is usually 0.25% if you withdraw within a certain period of time.

For example:

Mr. Shah has invested Rs. 1 lakh each in a Bank FD and Debt Fund for a period of 3 years and 1 day. The expected return for both these investments is 7.5%. Which investment will give him a better post-tax return?

Investment in FD

Investment in Debt Fund

Amount with interest/return

Rs. 1,24,230

Rs. 1,24,230

Index Cost

NA

Rs. 1,15,763

Tax Applicable Rate

30% (Higher Tax Slab)

20%

Taxable Gain

Rs. 24,230

Rs. 8,467

Tax Payable

Rs. 7,269

Rs. 1,693

Net Return (p.a.)

5.40%

7.00%

Have Referral Code?