Which debt fund is good at current value? Does it give better income than a fixed deposit after paying income tax. I am in the 20 per cent slab. Is there any lock-in period?
- Hari Krishna Maheshwari
In the current scenario, long-term debt mutual fund schemes are attractive. However, you should pick a debt mutual fund scheme only on the basis of your investment horizon. For example, your should invest in a liquid scheme to park money for a few days or weeks; or pick an ultra short-term scheme to park money for a few months. A short-term fund can used to park money for a year or two. A long-term debt scheme can be considered to park money for three to five years. If there is a mismatch between your investment horizon and the scheme of your choice, you could face volatility and/or incur losses.
It is true that debt mutual funds can offer you better returns than bank fixed deposits. However, you should remember that unlike fixed deposits, mutual funds do not guarantee returns. The returns would depend on the performance of their investments in the debt market.
Except for fixed maturity plans (FMPs), debt mutual funds normally do not have any lock-in period. However, early exits could result in a higher tax out go.
Investments in debt mutual funds held for more than three years qualify for long-term capital gains of 20 per cent with indexation benefit. Short-term capital gains on debt mutual funds are added to the income of the investor and taxed as per the applicable income tax slab.
This article was originally published on October 23, 2015.
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