Debt Mutual Funds – An Ideal Investment Idea for Conservative Investors

Traditionally, most Indian retail investors have been risk-averse, with majority of them investing in bank fixed deposits, government bonds, corporate deposits, etc.

Over the years, Fixed Deposits (FDs) have grown to become the de facto savings tool for households in India. This is prompted by the speed (booking FDs online), availability (book anytime), and ease of understanding of these products.

However, in the post demonetization era, the interest rates are going southward, and the secondary markets are looking bullish. This has prompted interest in alternative channels for debt investments like debt and liquid mutual funds.

Here are a few reasons to consider debt mutual funds for investing your savings:

  • Taxation

Perhaps one of the most important consideration is the tax treatment for the returns from these investments. While FDs attract a high rate of tax (based on the income tax slab), the incidence of tax for debt mutual funds varies based on the period of holding.

For a long-term debt fund, one can claim indexation benefits to significantly reduce the tax liability, making them more tax efficient as compared to fixed deposits.

  • Choice of Funds/ Managers

Unlike bank fixed deposits, that offer a single investment idea, debt funds are of multiple types, are offered by multiple AMCs, and are managed by different fund managers. Based on their objective, they invest in a wide range of securities with varying risk and return mandates.

Some of the popular debt fund categories are Income funds, Gilt funds, Fixed Maturity Plans (FMPs), Corporate Bond funds, Debt-Oriented Hybrid Funds, Capital Protection Oriented Funds, etc.

  • Fund Management Style

Unlike debt mutual funds, fixed deposits are passively managed funds. This means that they do not attempt to capitalise on the opportunities presented by the secondary markets. Debt funds, on the other hand, are managed by a dedicated team of researchers and fund managers, who track the markets regularly to make the most of the emerging trends.

  • Nature of Returns

The nature of return on investment for FDs and debt mutual funds are different. The former gives return in the form of interest, while the later offers capital appreciation and/ or dividends. This means that with debt mutual funds, you have an opportunity to earn extraordinary returns, while fixed deposits offer nothing more than the stated interest income.

  • Speed

KYC complainant investors can invest in debt mutual funds at any time, from anywhere. Investment platforms like Edelweiss Partners allows advisors and investors to choose from a wide set of debt and liquid mutual funds.

  • Opportunity to Set-up STPs

Unlike FDs, when you invest in a debt mutual fund, you can easily set up a Systematic Transfer Plan, to systematically invest in other fund/s within the same AMC. This allows you to space out your investments, while earning more than just bank interest.

Both FDs and debt mutual funds offers their own sets of pros and cons. Based on the risk appetite and the investment objective, an apt investment vehicle can be chosen.

Edelweiss Partners offers you a next-generation investment and portfolio management platform that helps you take quick and informed decisions for your clients. Become an Edelweiss Partner today!


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