As an investor, you need a better to lending. Debt Funds provide you a better route to lend and help you garner good returns as compared to Fixed Deposits. Read more about debt funds vis-à-vis bank deposits.
Bank deposit is a preferred choice for every Indian investor who is looking for a guaranteed return on their investments. However, the debt funds provide many other stronger reasons to prove that they are close rivals to Bank FDs. Mutual funds have a winning edge in terms of tax-adjusted returns and also in terms of safety by way of their diversified lending exposure.
When it comes to safety, Indian investors only look at guaranteed returns; but a guarantee does not mean safety. Safety can be achieved through strong regulator as well as proper diversification. Debt Funds offer both-they are SEBI governed hence provide complete safety of fund management, and they invest the collected pool into multiple borrowers’ paper. Since Mutual Funds are SEBI regulations, wherein they need to provide daily NAV of your units, based on the available market price. Many investors feel uncomfortable to see the fluctuating valuation of their investments. That’s is where they need education to interpret that transparency is not bad. If you will invest in debt fund then must give it adequate time as you give to your Bank FD-at least 3 years or so.
The other big difference is that of taxation. Returns from bank fixed deposit are interest income and as such have to added to your normal income. Since many investors are in the top (30 percent) tax bracket, this takes away a large chunk of their returns. Banks also deduct TDS on interest income from fixed deposits. The tax rates are similar for debt funds held for 36 months or less (though TDS will not generally be deducted). However, for debt funds held longer than 36 months, returns are classified as long-term capital gains and are taxed at 20 percent with indexation.
Return on Investment
As the returns of debt funds demonstrate, you can beat the bank by investing in debt funds. Investors assume both credit risk (lending to riskier borrowers) and interest rate risk ( the risk of bond prices falling when interest rates rise) and are hence compensated by higher returns.