Fixed-income products have always been a component of all household savings to offer investment protection and growth, at least in line with inflation. Fixed and Recurrent Deposits(RDs) have historically been the preferred outlets for daily savings. However, because of better returns, higher liquidity, tax efficiency and convenience, debt mutual funds have gained popularity in recent years.
Debt mutual funds score on several primary parameters over FDs and RDs:
- Easy withdrawal
You can withdraw or redeem them on any working day and are highly liquid. Both complete and partial withdrawals are approved, and redeemed cash gets credited on the next working day to the lender's bank account. Nowadays, this process gets done using mutual fund apps. There are no entry or exit charges for different types of short-term debt funds. Some debt funds levy exit load, so selecting the right kind of funds gets done properly.
- Tax-efficient
If the investment holding period is shorter than 36 months, the tax rate on short-term gains on debt funds is like other fixed-income items. But for a holding period of more than 36 months, debt funds qualify for an indexation advantage and, after adjusting for inflation, returns get taxed at 20 per cent.
Besides, unlike fixed deposits where TDS is deducted on investments every year, the tax on the debt funds is paid only in the year of withdrawal and not on the gains made on the withdrawn amount.
- Better returns
Debt mutual funds invest in a variety of fixed income securities such as treasury bills, money market instruments, deposit certificates, government bonds, etc. Due to active fund management, they can achieve superior returns than FDs and RDs.
- Convenience
After an investment has been made in a debt fund, unlike FDs, where each new investment results in new FDs, additional sums get added at any time in the same fund. Besides, unlike an FD, where early withdrawal results in a decreased return rate on the withdrawn FD, the return rate on the investment does not reduce in the case of partial withdrawal.
Investors who invest in several FDs or may have to exit early in an emergency find it simple and easy to handle debt fund investments.
Debt funds, which are slightly higher than fixed deposits, are an option for investors seeking stable and daily returns. They give investors, especially those who are in the higher tax bracket, better post-tax returns.
While fixed deposits provide peace of mind due to their guaranteed returns, it provides investors with ease, flexibility, and liquidity.