Why are debt funds a good option for short-term investment?
In Money ki baat with ETMONEY, let me tell
you a story today. The story is of Anirudh. Anirudh finds equity
quite risky and avoids investing in the stock market. So
he has all his savings in Bank FD and RD. But now Anirudh feels that the returns on
his savings aren’t able to beat the inflation rate. His wealth is decreasing rather than
increasing. The rate at which inflation increases every year accordingly, our money kept in
the bank decreases. His friend Sudhir, who explained this simple
thing to Anirudh, told him that apart from equity, there are also mutual funds
schemes that invest in debt. debt mutual funds i.e. schemes that invest
government bond or any bonds issued by corporate. When you give money to a bank
the bank gives you interest and then lends your money to another company for more interest.
When you invest in debt through Mutual fund then actually your money is invested in bond
purchased by the mutual fund. Mutual fund lends your money directly to the company. Hence debt funds can earn you more than a bank deposit. In comparison to equity
risk also decreases significantly. Debt mutual fund schemes are of different types. In
liquid funds, you can invest for a few weeks or months. The most important thing is that
the risk in these schemes is negligible. if the need for money arises on the day next to investing day, you can withdraw money the next day itself. if you have to invest for 1-3 years, short
term funds can fulfill your requirements. that means if you are investing for more than 1 year then short term funds is a better option. But there is risk connected to it. It would be better keeping the risk involved in mind
before investing. You can invest in it for 3 years. Debt mutual funds are more tax-efficient
than FD. The profit on debt mutual funds is considered a capital gain.
Whereas the profit earned on FD or savings account is interest income.
According to tax rules, interest income is directly added to your annual income. That
means if you are in tax bracket for 30% yearly then on interest income you will have to pay
tax including 30% plus cess. If you are in the bracket of 20%, then you have to pay
a 20% tax. In comparison to this, if you invest for 3 years or more in debt mutual fund schemes long term capital gain is charged.
Which is 20% on your income and also with the benefit of indexation. Indexation
is a formula by government It deducts the inflation during the investment
period from the profit earned on investments. If you invest for 3 years or more than 3 years,
then your tax comes to 5-8%. So far the debt mutual
fund schemes have offered better returns than FD. If tax’s advantage is added to this, then
returns become even better. Means debt schemes have the capacity to give more returns than
bank FD. After that, all doubts had disappeared from
Anirudh’s mind. And based on his requirement he purchased his first debt fund scheme from ETMONEY
without any further delay.