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Which debt fund to invest?

You should not focus solely on returns while investing in debt mutual fund schemes

Dynamic Bond Fund or Short Term Floating Income Fund -- which is better in terms of annual yield? What is the tax and risk involved in them?
- Rita Gupta

You should not focus solely on returns while investing in debt mutual fund schemes. It is equally important to pick up a scheme that matches your investment horizon. Floating/floater short-term funds are liquid funds. Liquid funds are ideal for parking money for a short period of, say, a few days to a few weeks. Dynamic Bond Funds are suited for slightly longer term, say, three years or more. Investors are expected to enter and exit long-term debt schemes with a clear view on future interest rate movements. It is not an easy task for most of the investors. Dynamic Bond Funds solve this problem for them. Investors need not take a call on interest rates while investing in dynamic bond funds because the fund manager does the job for them. The fund manager dynamically manages the portfolio based on his view on interest rates.

Taxation is same for both liquid and dynamic funds. If you sell your investments before three years, you will have to pay short-term capital gains tax at the income tax slab applicable to you. If you sell your investments after three years, they will qualify for long-term capital gains tax of 20 per cent with indexation benefit.

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