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Investing in Short-term Debt Funds

Debt funds offer no tax advantage over bank fixed deposits of the investment is for less than 3 years

I have recently (7 days ago) redeemed some of my equity funds with some long term capital gains. The sum will be used for down payment towards a home which I will be buying sometime in January 2016. This may be delayed by three months. My question is whether I should keep the money in FDs or debt MFs. Considering the tax changes in the last budget this year, is there any advantage in investing in debt MFs? If yes, can you please suggest some debt mutual funds? Also, how difficult it is to file tax when we have debt MFs in the portfolio? I have never invested in debt MFs and all my investments are in Equity SIPs and the PPF. I am in 30% tax bracket and my age is 38 years.
- Vishal Gupta

You can go in for short term debt funds which invest in corporate bonds and gilts with a short tenure. From the tax point of view, debt funds offer no advantage over fixed deposits if you invest in them for less than 3 years. In both these cases, the gains you make get added to your income and taxed according to your tax slab. But debt funds do score over bank deposits on two counts. They offer superior liquidity. You can withdraw at any time without any penalty. By actively managing their portfolio, they can also deliver better returns than deposits. They have managed to give decent returns in the range of 7.5 per cent to 10 per cent. These funds are actively managed so there is a better chance of delivering higher returns than the bank deposits which again makes them a suitable option.

You can invest in Peerless Short term, Sundaram Select short term debt asset plan, Franklin India Ultra short term bond fund, Taurus Ultra short term bond fund and SBI Magnum Income fund. These are part of the short and ultra short term category as per our classification.

Answering the second part of your question, it is not difficult to file tax when we also have debt MFs in the portfolio. Any capital gains or loss needs to be declared when filing the tax return so that the tax amount can be calculated accordingly.



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