Debt funds or bank FDs: Where to invest your emergency corpus? | Value Research Let’s take a look at how and where should you park your funds for emergencies
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Debt funds or bank FDs: Where to invest your emergency corpus?

Let's take a look at how and where should you park your funds for emergencies

Investing a portion of your emergency corpus in debt funds can help you optimise returns in a tax-efficient way. Ideally, the emergency corpus should be spread across three layers.

The first layer of emergency corpus should be in cash, in the locker of your cupboard. A reasonable amount depending on your personal circumstances should work. The second layer can be your bank account or a fixed deposit which can be readily liquidated. The third layer can be a liquid fund or an ultra-short duration fund. It will help optimise returns on the idle money and that too, in a tax-efficient manner.

Unlike fixed deposits, the gains from debt funds are taxed only when they are realised, that is at the time of redeeming your money. In case of a fixed deposit, the accrued interest is added to the taxable income every year and taxed as per the applicable slab.

So for someone falling in the highest tax bracket, the interest on fixed deposit is taxed at 30 per cent. Whereas in case of a debt fund, if the investment is sold after three years, the gains are taxed at 20 per cent after providing the benefit of indexation. However, the tax treatment is the same as fixed deposits if they are sold within three years. But still, they have a potential to give higher returns than a fixed deposit.

However, do remember that debt funds do not guarantee returns or preservation of capital like fixed deposits. Though liquid funds and ultra-short duration funds are less risky than other categories of debt funds, they do carry risk. Don't get swayed away by higher returns while choosing a debt fund as they may be assuming higher risk. Look for a fund with high quality papers.

Check out how to select a debt fund for more insight.


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