How Debt Mutual Funds score high compared to savings or Fixed Deposits?
There are several investors who are still investing in savings account or fixed deposits that are offering low returns. This is due to lack of knowledge about various investment options available to them. While other investment options are high risk, debt mutual funds on other hand can provide good returns though not fixed compared to SB account or FDs. In this article, let me analyse the trend of savings and FD rates and how debt mutual funds would score high.
You opened simple bank account and keep your hard earned money in your SB account. Currently the SB account earns 4% interest rate per annum. Unless you invest your money efficiently, your money would lie in SB account and earns 4% interest rates. There is no change in SB interest rates in the last 10 years. Why should you keep your money in SB account then?
Currently banks are offering FD interest rates of 4.5% to 8% based on the tenure. However do you know that in 1992 and 1994, banks offered almost 12% interest rates. In 2009-2010, it has even fallen to 6.5% interest rates (source RBI). Bank FD rates are in downtrend for the past 10-15 years. Experts believe that such FD rates would continue to fall in coming years. In such cases, should you park your investments still in bank FDs?
Debt mutual funds invests in fixed income options and provide higher returns compared to bank FD.s
Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. Generally, debt securities have a fixed maturity date & pay a fixed rate of interest.
You can invest as low as Rs 500 per month through SIP or lumpsum investment in these debt mutual funds.
There are short term debt mutual funds and long term debt mutual funds based on the tenure where an investor want to invest.
There are different types of debt funds like gilt funds, income funds, MIP mutual funds and liquid funds.
These debt mutual funds can provide anywhere between 8% to 12% annualized returns.
Debt funds are tax efficient compared to bank FDs. In bank FDs, income tax needs to be paid every year, irrespective when it is received. However in case of debt funds, short term or long term capital gains tax needs to be paid only once these are sold. E.g. if you are selling them after 3 years, you need to pay tax only at that time and not every year.
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Conclusion: Debt funds score high compared to SB account or fixed deposits. One should understand how debt funds work and choose a good fund based on the tenure of the investment. This way an investor can earn higher returns in debt funds.
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