Fixed income products have always been a part of every household’s savings to provide security and growth to the investment. It also protects you from inflation. Traditionally, people preferred fixed deposits and recurring deposits for investments and relied on them for regular savings. However, nowadays, you can find many diverse investment options with the rise in the number of investors.
Another category added to this group is debt funds. They are beneficial as they provide better returns, offer higher liquidity, tax efficiency, convenience, and lots more. Compared to traditional investment opportunities like FDs and RDs, you can get various benefits and options to increase your invested capital. Here are some of them:
- Easy withdrawal: These funds are highly liquid, which means you can withdraw or redeem them on any working day. Full and partial withdrawals are allowed, and the redeemed money gets credited to your bank account the following day. In short-term debt fund categories, there is no entry or exit changes. Some of them levy exit load, so choose your fund category wisely.
- Better returns: Debt mutual funds invest in various fixed income securities like treasury bills, money market instruments, Certificate of Deposits, government bonds, etc. They can generate superior returns than FDs and RDs due to active fund management. Some fund categories like gilt funds, dynamic bond funds and constant maturity funds may be volatile in short periods. Hence selection of the right fund for individual needs is critical.
- More tax-efficient: The tax rate on short term gains on these funds is like other fixed-income products if the holding period of investment is less than 36 months. But for a holding period of more than 36 months, they qualify for indexation benefit and the gains are taxed at 20% after adjusting with inflation.Also, unlike fixed deposits where TDS is deducted every year on investments, tax in debt funds is charged only in the year of withdrawal on the gains made on the amount withdrawn.
- Convenience: Once you invest in this fund, you can add an amount in the same fund at any time, unlike FDs, where every new investment results in the opening of a new FD. In partial withdrawals, the investment return rate does not reduce, unlike FD, where early withdrawal results in a reduced return rate.
Investors who invest in multiple FDs or may have to withdraw early in emergencies find investments in these funds convenient and easy to manage. You can also use mutual fund apps for investments and operate them from any corner of the world. With digital technology, you can access all financial instruments with a click or a tap.
Nowadays, all banks and financial institutions offer their products and services on websites and compatible mobile apps for convenience.