Why should one opt for a pure debt fund as compared to other safe investments like bank fixed deposits? For example, Kotak Flexi Debt, a 5-star rated debt fund, has given a return of 7.21 per cent for a period of three years. A bank deposit would fetch more. —Rahul Maheshwari
Fixed deposits are secured investments when compared to debt funds. Sometimes they may offer higher returns as well. But the main point of difference is in the tax treatment of gains. The interest earned on a fixed deposit is added on to your income, irrespective of the term of the deposit. Further, there is no distinction between short- or long-term capital gains tax in fixed deposits. What makes debt funds a better choice is the tax treatment on its gains. The short term capital gain on debt funds is added to your income .But in case you redeem the investment after one year (long-term capital gains), you can avail the indexation benefit.