Investors often look forward to investing in mutual funds as these are more tax efficient than other instruments like fixed deposits.

The only option then for investors is to look at debt mutual fund schemes. Even in doing so, you must look at funds that have low expense ratio. Amongst this one can look for liquid funds as they have low expense ratio. Here is a look at 2 debt dedicated mutual fund schemes that can offer good returns. Check daily mutual fund gainers and losers

HDFC High Interest - Dynamic Growth

The fund has given returns of nearly 9 per cent in the last one year. This is inline with interest rates received from fixed deposits of banks. However, the post tax returns can be much higher in the case of debt mutual funds if one takes into account dividends received which are tax free in the hands of investors. The 2 year returns from the fund has been close to 10 per cent.

The portfolio of the fund comprises government securities, which makes the mutual fund scheme extremely safe to invest.

ICICI Prudential Long Term Fund Retail Plan

The fund has given a return of almost 11 per cent in the last one year. It has been well rated by most analyst and has sizeable assets under management. One can begin with a minimum investment of Rs 5000 under the plan.

This is an extremely safe plan to invest in as most of the portfolio of ICICI Prudential Long Term Fund Retail Plan is in government securities, which makes it a safe investment.

Taxation on debt funds

Before investing in mutual funds its important to understand the tax implications on mutual fund schemes. In the Dividend option, the dividends received under debt income plans are not taxed in the hands of investors, but fund houses tend to pay the tax. If you opt for the growth option and if you make profits selling the units before a year, you are taxed at the same rate as per your income tax slab. If investors redeem units after a year, they have to pay a long term capital gains.

Conclusion

There are various other mutual fund debt dedicated schemes that are low risk and can offer superior returns when compared to banks. In any case, as mentioned debt dedicated mutual fund schemes are more tax efficient and hence you can opt for them over bank deposits. However, you must opt for the dividend payout plan and not the growth option, which will be taxable. Read more on how mutual fund schemes are taxed

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