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Pros & Cons of Debt Funds

The principal amount should not erode due to investments

My current investment portfolio is tilted too much towards equities and equity mutual funds and the exposure to save havens like bank fixed deposit, NSC, PPF, etc is very limited. I want to balance my portfolio’s allocation between equity and debt. I have been told that debt funds are a better option as compared to a bank fixed deposits. I am open to investing in debt funds for a period of 2-5 years but I want to ensure that these investments do not erode my principal. Please guide.
-    Himanshu Mehta

Debt funds do have an upper hand over bank fixed deposits in terms of liquidity and taxation. A debt fund is much more liquid than a bank fixed deposit which involves a lock-in and invites a penalty on premature withdrawal. From the taxation point of view too, debt funds are more tax friendly for long term investments. While the interest earned on bank fixed deposit is added to an individual’s income and taxed as per the applicable tax slab, the long-term capital gain on a debt fund will be taxed at 11.33 per cent without indexation or 22.66 per cent with indexation.

But it is to be remembered that no mutual fund gives guarantee of performance and there is no assurance that your capital will be safe. If you are completely averse to taking risk, a risk-free assured return instrument like bank fixed deposit, NSC or PPF would be more suitable for you.

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