Ultra short-term debt funds suit the needs of those looking to invest for less than a year...
01-Apr-2013 •Research Desk
Please suggest a good fund in debt or liquid category to invest in, for a three to six months duration.
If you want a risk-free investment option then there is nothing better than a bank term-deposit. But if you are willing to take slight risk, debt mutual funds can give better returns. Mutual funds score high in terms of returns as well as taxation.
Currently, banks are offering an interest rate of 6-7.25 per cent per annum on a 91-120 days deposit. The interest from bank FD will be added into your income and will be taxed according to your slab (highest 30%). Therefore the post tax return will turn out to be very low. On the other hand, the category of ultra short-term debt funds has delivered a return of 9.35 per cent in the past one year.
These funds invest in corporate papers like commercial papers, certificate of deposits, bonds etc of maturity up to one-year. Although, the returns are market linked and these funds are exposed to credit risk, these funds do not materialise risk. They are tightly regulated and monitored by SEBI to guard investors interest. Also, the interest rate risk is low due to investment in paper of smaller duration.
These funds are more tax efficient than bank term deposits as the dividends are taxed at a lower rate of 13.5 per cent including surcharge and cess. Although short-term gains (less than a year) from these funds will be added to the individual's income but long-term gains will be taxed at 10 per cent without indexation and 20 per cent with indexation. You can choose a good fund from the fund selector tool on our website.