For better returns go for short term debt funds instead of bank FDs
Investment in short-term debt funds provides low average maturity periods and helps in delivering higher returns than other bank fixed deposits.
Short term debt funds are superior to bank FDs in terms of returns, liquidity and taxation. While most banks are currently offering the highest card rate of 7% p.a., whereas the best performing short-term funds category have generated annualised returns of around 10.13% p.a., over the last 3-years period.
“As far as liquidity is concerned, though banks FDs are highly liquid, they carry a penalty of up to 1% when redeemed before the maturity date. Moreover, the applicable interest rate for the actual period of the investment is the lower of the card rate and the contracted rate. Short-term funds don’t penalise redemptions unless they are redeemed before a pre-determined period. This period can range anywhere from 15 days to 6 months. Similarly, their exit loads can too vary across funds ranging from 0.25% to 1% of the amount redeemed,” said Manish Kothari – Head of mutual funds, Paisabazaar.com.
Helps in offering rational returns
Debt funds are mostly segregated as Liquid Funds, Ultra Short Term Funds, Floating Rate Funds and Corporate Bond Funds on the basis of their investment holding period which is done in several debt instruments and fixed income securities like Treasury Bills, Government Securities, Corporate Bonds, and Money Market Instruments etc. Therefore, depending upon the type of fund, the tax implication of these funds also gets vary.
Debt funds are considered safer than equity funds because the investment made in debt instruments and fixed income securities generally offer a fixed rate of return and have a fixed date of maturity and also, they are not linked firmly to the stock market movement.
Helps in maintaining a healthy portfolio
Short-term debt funds play an important role in asset allocation strategy. As equity investments carry significant risk of capital erosion in the short-term (less than 3 years), investing in equity funds for meeting short-term financial goals or liquidity requirements is not advisable. “The best option would be to invest in short-term debt funds as their low average maturity periods reduce the risk of principal erosion to negligible levels while the active portfolio management helps in delivering higher returns than fixed income instruments,” added Kothari.
Helps in fulfilling financial goals
Short-term debt funds are best suited for financial goals maturing between 1–3 years. Historically, they have offered higher post-tax returns than other non-equity alternatives for the said period.
Kothari also said that for goals maturing within 1 year, invest in ultra-short term funds. These funds do not charge exit loads and are less vulnerable to interest rate movements due to their lower ‘average maturity period’.
Short-term debt funds also outscore bank FDs in terms of taxation when held for more than 3 years. While interest earned from fixed deposits is taxed according to your applicable income tax slab, the tax treatment of gains realized from short-term funds depends on the period of your investment. Gains realized within 3 years of investment are treated as short-term capital gains and added to your income for tax computation. Gains realized after 3 years are treated as long term capital gains tax and taxed at 20% with indexation and 10% without indexation. Short-term debt funds like Kotak Banking & PSU and Kotak Flexi Debt – Plan A has also given returns for up to 9.48% in one years and 10.13% in 3 years respectively.Here are top five examples of ultra-short term debt funds and short-term debt funds on returns basis.
|Ultra-short term Debt Funds||Returns over last 1-year|
|Kotak Banking & PSU||9.48%|
|Franklin India Ultra-short Bond Fund — Super Institutional Plan||9.36%|
|BOI AXA Treasury Advantage Fund — Regular Plan||8.85%|
|L&T Floating Rate Fund||8.80%|
|Birla Sun Life Floating Rate Fund — Long Term Plan||8.76%|
Source: www.paisabazzar.comUltra-short term debt funds are best suited for investment horizons of 3–12 months.
|Short-term Debt Funds||Returns over last 2-years (annualised)||Returns over last 3-years (annualised)|
|Kotak Flexi Debt – Plan A||11.08%||10.13%|
|ICICI Prudential Short Term Fund||9.74%||9.56%|
|UTI Banking & PSU Debt Fund||9.74%||9.36%|
|Franklin India Low Duration Fund||9.66%||9.73%|
|HDFC Regular Savings Fund||9.45%||9.72%|
Source: www.paisabazzar.comShort-term debt funds are best suited for investment horizons of 1–3 years.