While after the recent debt fund debacle from many NBFCs including IL&FS and then DHFL, investors have been wary of considering them in their portfolio. Nonetheless, debt funds with good credit rating can go a long way in providing you superior return than FDs.
Here are some of the key points of difference that you may consider when deciding on your fixed income-based portfolio.
Also, the short term debt funds are suggested in light of the fact that the RBI governor in its recent monetary policy review meet held that rates shall be cut until growth is seen. So, as we see interest rates falling on the fixed deposits in line with the cut in key repo rate. Investors with a short term horizon can even consider investment in short term or ultra-short term debt funds. Ultra short term funds are typically debt funds that invest in short duration fixed income assets with maturity between 91 days to typically 1 year. While FDs with lower risk and backed by deposit insurance scheme of up to Rs. 1 lakh can be invested in for any tenure between some days to 10 years
Here are the attributes in which FDs differ from debt funds:
1. Minimum investment: In case of debt funds, via the SIP route investors can start their investment with as low as Rs. 500 while for lump sum the minimum investment requirement is Rs. 1000. In the case of bank FDs, it is a minimum of Rs. 1000.
2. Returns: Typically if held for one year, this category of debt mutual funds provide a higher return of 7% and more, which is up to 7% in case of bank FDs.
3. Liquidity: In some of the mutual funds with low maturity there are no exit load charges, while if the bank FD is redeemed pre-maturely there is a charge attached to it.
4. Risk level: In case of ultra-short-term debt funds the risk is higher than in case of liquid funds but this for the capacity to make higher returns. On the other hand, bank FDs are considered less risky as there have cropped up recent frauds as in the case of the Mumbai-based PMC Cooperative bank.
5. Taxation: In case the debt fund is held for more than 3 years then LTCG applies which is charged at the rate of 20% with indexation while short term gains are taxed as per the individual's slab. In the case of FDs, interest income is added to the gross income and taxed as per the tax slab.
6. Inflation-adjusted returns to be better in case of debt funds: Inflation-adjusted return in case of bank FDs can be merely 1-2% while at the expense of some risk element, the real rate of return after adjusting for inflation will be higher in case of ultra short term funds.
So, if you are not a novice mutual fund investor and have substantial know-how on its working and take that extra risk to get extra bucks do take a dig in these short term debt funds which can yield a better return than bank FDs in the falling interest rate regime.