Have you ever thought of a risk-free investment option? Every investment product has some type of risk involved with it. The chance of these risks occurring plays a major role in determining the investment product’s return potential. It is well known that equity funds carry high market-linked risk but people still invest after proper evaluation. Similarly, other investment products also carry risk but vary significantly from one product to another.
Certain issues concerning debt funds have put some doubt in the minds of investors. Debt funds have had quite a long history of good stable returns. Doing good research before investing can help avoid any unwanted issues. Here are a few things to keep in mind before investing in them.
Tax benefits
Inflation risk can be avoided for the most part through indexation benefit when tax is calculated on their long-term capital gains. A 3-year investment in a debt fund is considered long-term, and capital gains from this are called long-term capital gains (LTCG). But if it is less than 3 years then it’s short-term capital gains (STCG). The LTCG tax on debt funds is charged at 20% along with indexation benefit, whereas the STCG tax is charged according to the applicable income tax slab rate. Thus, those in the higher tax bracket can save much more by investing in a debt fund for LTCG benefits.
No TDS like FDs
Investors are who prefer low-risk but better returns than bank FDs often opt for debt funds. If interest earnings in FD surpass Rs 40,000 in a financial year, then the bank will deduct a 10% TDS on it. In the case of debt funds, they are not subject to TDS. Tax liability on debt funds arises only after redemption. Thus, debt funds give much higher returns when interest rate trend is downward in contrast to FDs, which provide more returns when interest rate trend is higher
A few pointers to keep in mind when you invest in a debt fund today:
There are various kinds of debt funds with varying levels of risk associated with them. Keep a close tab on credit risk, interest rate risk, liquidity risk, duration risk, etc. In the current situation, investing in a debt fund that holds securities for the short-term is much safer as compared to other alternatives. These funds are usually concentrated around G-Sec or AAA-rated securities. Investors looking for very low-risk can opt for the Bharat Bond ETF option.
Debt funds are not risk-free. But one major advantage is that the risk can be managed more efficiently than equity funds. The right selection of debt funds and regular monitoring is quite essential.
