Debt Funds

High liquidity: Debt mutual fund schemes are often seen as an alternative investment to fixed deposits – as they provide income over time. Fixed deposits usually have mandatory lock-in periods and/or take a long time to process withdrawals when an investor wishes liquidate the investment. Debt mutual fund schemes, especially liquid funds, have a high degree of liquidity and investors can ‘cash out’ their investment far more quickly than most other comparable investment options.

Tax efficiency: While it is true that long-term and short-term capital gains tax does apply on debt mutual fund schemes, it should be noted that the benefit of indexation increases after three years of holding and with each passing year after that. Also, debt schemes are not affected by TDS. Alternative investment options like fixed deposits have a straight deduction of 10.3% if the interest income exceeds Rs.10,000 in a single year. The income on fixed deposits is also taxed every year from the start of the deposit, but the total money earned will only be accessible on plan maturity.

Flexibility: Money that’s been invested in a debt fund scheme can often easily be transferred to an equity scheme or any other scheme of the investor’s choosing. Alternative investment options do not provide this level of flexibility to investors – e.g. fixed deposits can only be opened or closed, not transferred.

Higher returns: When compared to the traditional options like savings bank accounts or fixed deposits, debt mutual funds offer the possibility of far higher returns.