07 Aug

Debt Mutual Funds – an excellent alternative to Banking products

There is a common misconception about mutual funds. Many believe that they invest in only equity related asset class and are very risky. However, this is very far from truth. Each Mutual Fund scheme invests as per the mandate of the fund. The mandate of each scheme differs. It could be investing in equities of large or small companies, or in gold or investing in fixed income instruments like bonds or debentures. The riskiness of each type of scheme depends on the mandate of the scheme.
Most of us (Resident & NRI’s) invest in Bank Fixed Deposits or Savings Account. The ease and convenience of investing makes them very attractive. However, please note the money taken by banks are then onward invested into instruments like government securities, corporate bonds, loans etc. The bank after keeping their margins passes on the returns to the depositors. The returns to the depositors would then be subjected to TDS or income taxes.
Similarly, debt mutual funds also invest in debt instruments of corporate and government. Typically their cost of operation is much lower than banks and as such investors in debt mutual fund can potentially get higher returns than similar maturity deposits. Also, the returns from a debt mutual funds are tax efficient as gains after 3 years (long term gains) are taxed at concessional tax rates ( net of inflation) whereas bank deposits ( Resident and NRO) are taxed at marginal tax rates. It could also be noted that only realized gains are taxable in debt mutual funds whereas even non realized gains (Resident /NRO) are taxed in case of banking products.
The following type of schemes is suggested for each category of investors (residents & NRI’s)
1. Overnight/ Liquid Mutual Funds: for investment horizon between 1 day to 3 months. Excellent alternative to savings and current account to deploy short term surplus. The returns typically would be the short term money market rates.
2. Ultra Short term Mutual Funds: for investment horizon of between 3-6 months. Excellent alternative to short term deposits of between 3-6 months. The returns typically would be the money market rates of 3-6 months.
3. Short Term Mutual Funds: for investment horizon between 6-36 months. Excellent alternative to deposits of 6-36 months. The returns typically would be the money market/ short term debt market rates of 6-36 months.
4. Medium Term/ Long Term Debt Mutual Funds: for investment horizon of more than 3 years. These would be an excellent alternative to 3 year plus FDs (Resident and NRO) as the taxation would be very low as the taxation is post inflation. The returns typically would be the long term debt market rates.

Some of the other salient features are:

• NRIs can invest on a fully repatriable basis from NRE account.
• NRIs can also invest the balances of NRO accounts on non-repatriable basis.
• One can invest anytime including additional purchases. Full and partial exits could be done at any time.
• The transactions could be done either online or offline.
• No TDS for residents on the withdrawals. No tax implication on growth.
• No entry loads. Exit loads depend on the type of the schemes.
• Much safer than equity scheme in the short term. Returns do not depend on the equity markets.
• Fully regulated by SEBI under the Ministry of Finance.
• Returning NRI’s can plan to invest quite early to reduce the taxable income once the Residency changes and Indian tax laws apply.
Illustration: If one has an average balance of Rs 1 lakh in his/her savings account for a year, the savings account at 3.50% p.a. would yield Rs. 3,500. The same money invested in a liquid mutual fund (at around 7% p.a. (not assured)) would yield approximately Rs. 7,000 which is double the savings account rate.

1. Mutual Fund Investments are subject to market risks. Kindly read the scheme information documents carefully before investing.
2. It is very important to consult a professional planner while implementing any of the above ideas.
3. The above are mere suggestions and not Investment Advise as individual cases might differ

In case, some of the above ideas appeal to you and you would like professional guidance, then feel free to connect to me at 9845557582 or naveen@naveenrego.com.

Do visit us at www.naveenrego.com to read the disclosure statement and our past Investment Ideas in the blog section.

Happy Investing!!

Naveen Julian Rego-CFP
SEBI Registered Investment Adviser

10th July, 2019

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