Many people are sad after indexation benefit is removed from debt mutual funds. It’s true that it lost the shine now. Returns are now as equal as FD’s depending on the interest rate. Know the advantages and disadvantages of debt funds after the new proposal.
Disadvantages:
- Riskier than Fixed and other Government bonds
- Returns are almost same as FD’s after removing indexation benefit
- You need pay the expense ratio like other mutual funds
- Need to research about the type, risk involved in that debt fund and type of bonds it is investing in because Adani bond holders may not even get thier capital back now since bond prices are fallen hugely
Advantages:
- We can redeem at any point in time unlike in FD’s there will be fixed lock-in peroid
- You will be taxed only when you sell your mutual funds where as in Fixed Deposits, you will be taxed on the interest received
- During tax harvesting at the end of year, one can take the advantage of setting off capital gains or losses
Simply, if you want to add some flexibility layer to your debt profile, consider debt funds. If you don’t want your funds for a longer period of time and want to earn better interest rate, park your funds in bank FD. Don’t invest more than 5 lakhs because even if the bank defaults, upto 5 lakh limit, your deposits are insured.
If you are not sure whether you need your funds or not in the middle of your lock-in period, you cannot redeem your money from your FDs, you can redeem but you may not get proper interest rate returns. So, if your debt portfolio is around 2 lakhs, divide into half, 1 lakh each and invest half of the money i.e, 1 lakh in fixed deposit and other half, 1 lakh in debt mutual funds. It would be a better choice.
No asset class is bad, everything has it’s own advantages & disadvantages, know what fits you and how much of your investment money should be allocated in that !!
