We all know that fixed deposits are instruments issued by banks which promise to pay a certain fixed rate of interest on the principal amount for a certain amount of period. At the end of the period, the principal along with the accumulated interest (for cumulative schemes) is returned back to the investor. Now, let us briefly understand what is a debt fund?

What is a Debt Fund?

A pure debt fund is a mutual fund which would generally invest its corpus in assets generating fixed income. The underlying investments are generally in Central and State Government Bonds, Treasury Bills, Government securities, high credit rating corporate Non Convertible debentures (NCDs) etc. These investments are generally considered very safe as credit rating of the underlying issuing companies/government is very high and a chance of default is negligible.
Like other mutual funds, one can purchase units of these funds based on daily NAVs (for open ended funds).

Traditionally, FDs have given returns of 6% -10% (depending upon the tenure of investment) over the past 5 years. Let us see what returns some of the best performing debt funds have given over last 5 years. I have chosen 5 pure debt funds from different fund houses for comparison.

The average return from debt based funds has been around 11.75% pre-tax as compared to 9-10% returns (pre- tax) given by FDs in the last 5 years.
Even if we assume that both FDs and Debt Funds will give the same returns for the next 15 years (say 9%), then also for people falling in higher tax brackets (20% and 30%), post tax returns for debt funds will be much higher.

Conclusion

Even though debt funds carry negligible risk and have some charges associated with them, they have emerged as a very good investment product for risk averse investors. They are very tax efficient and hence give much higher post tax returns. Hence, people, especially in higher tax brackets, should definitely consider investing in these as an alternate source of investment to traditional FDs.

About the Author:

Vikas Sonigara, is an alumnus of IIT Roorke and has been an active investor for the past 15 years. He blogs about financial markets and various financial products at www.finfundaz.com. He can be reached at [email protected]

Courtesy:www.investmentyogi.com