WHY INVEST IN DEBT MUTUAL FUNDS
Following are some of the reasons that make debt mutual funds a better investment choice than other options with fixed income.
MORE LIQUID THAN FIXED DEPOSITS: A debt fund is very liquid i.e. you can withdraw your investments at any time and money will be in your account next day. Most debt funds don’t levy a charge if investment is redeemed after one month. So, it provides lot of flexibility.
TAX EFFICIENT: In long term, debt funds are far more efficient than fixed deposits. The longer you hold the debt fund, the bigger is the indexation benefit. No TDS is deducted in case of debt funds. But in case of fixed deposits, if your income exceeds Rs 10,000 in a year, bank will deduct tax @ 10.3% from your income. And if you are not liable to pay tax, you will have to submit either Form 15H or 15G to escape TDS. Income from fixed deposits is taxed on annual basis and you will get money after maturity i.e. may be after 5-6 years, but you have to pay tax every year.
HIGHER RETURNS: The pre-tax returns from debt funds are comparable with those from other debt options such as fixed deposits and bonds. But if there are changes in interest rates, your debt fund could give higher returns. Funds that invest in long term bonds are more sensitive to changes in interest rates.
GREATER FLEXIBILITY: Debt funds are more flexible. You can invest small amounts every month by way of an SIP or whenever you have surplus cash. But you can’t open fixed deposit every time you have an extra Rs 2,000-Rs 3,000. Another advantage is that you can easily shift the money from a debt fund to an equity fund or any other scheme from the same fund house. One more and main advantage is that there is no penalty if the STP stops due to insufficient money in your debt fund.