Debt mutual funds offer various options to invest. One can look at liquid, ultra short term, short term, medium term & long term debt funds. There are funds focusing on government securities (G Sec). There are funds having dynamic allocation to rate sensitive securities & funds holding the securities till maturity. There are funds catering to low risk investors & there are funds designed for aggressive investors, as well.
1. The tax advantage
Interest earned in savings bank account (more than Rs 10,000 per year) and on FDs is taxable as per your tax slab. Debt mutual funds quality for long term capital gain taxation benefit after holding period of 3 years or more with indexed gains getting taxed @ 20%. The logistics advantage with debt mutual funds is that you don’t have to declare income every year and pay tax. You only pay tax on the gain at the end, post redemption.
2. The power of asset allocation
It is not a good idea to be at 100% equity allocation at all the time. Investing in debt mutual funds augments your asset allocation. While investing through SIP, you can even target the ‘To be’ asset allocation over a period of time. Since an asset class like equity presents non linear growth, presence of debt investments in your portfolio helps you through turbulent time.
3. Opportunities
Based on the size or your portfolio, an active management may be helpful. If you invest in debt funds and build corpus, when the equity markets present opportunities during crash, it will be much easier to move the money from debt funds to equity funds via a simple switch. The focus can shift to strategy than transaction & logistics as the money is already available in the deployable corpus. Further, to an informed and high risk appetite investor even the debt securities can provide opportunities to generate additional yield.
4. Emergency corpus
If you invest in liquid or ultra short term funds, the resultant liquidity helps to build your emergency corpus. Most of these funds do not have any entry load, exit load or lock in period. This makes it very convenient to get money available at call within just one working day. Over a period of time, such liquidity can be extremely helpful in managing career transitions, exigencies and out of budget spends.
5. Good start
Debt funds are a good option to you if you are beginning your mutual fund investments and not sure if you would be ok with equity mutual funds. Experience in Debt funds gets you ready with understanding the basics and watching NAVs, you can then better decide if you like to jump into equity mutual funds as well. As an example, the hybrid mutual funds with majority of investments in debt securities, allow you to spice up your overall returns by taking a small exposure to equity.
6. Consolidation
A significant advantage here is that you get to consolidate your portfolio. You can move out of those various FD, RD & dormant Savings accounts. Having your wealth on a single screen at a single place simplifies and allows you to better manage your portfolio. When you better understand what you have, it’s much easier to distribute them to your goals as well. A consolidated portfolio drastically reduces your per transaction cost & efforts. You can make informed decision on your finances when you precisely estimate your ‘as is’ state.
Conclusion
Debt mutual fund investments are convenient, flexible, inexpensive, scalable & tax friendly. They should not be ignored because ‘they just give 8-9% returns’. They certainly deserve to be a part of your portfolio. As the fixed income securities returns have started inching down, it’s even more important that you earn slightly higher return and save taxes.
Source: Rohit Shah, Moneycontrol.com