Debt mutual funds lose indexation benefits: Top alternatives for HNIs and fixed income investors

The end of tax benefits for debt mutual funds reminds investors and HNIs to explore alternative investment options like FDs, bonds, PPFs, and mutual funds.

Debt mutual funds

Debt mutual funds had a unique advantage when it came to saving taxes. The 20% income tax payment, and the indexation benefit, meant that high tax bracket investors, including HNIs, made lower tax payments on debt mutual funds compared to their tax slab.

However, that is history now, as debt mutual funds with less than 35% equity exposure will be taxed as per the tax slab of the assessee. These funds have been ideal for fixed-income investors who want a steady income with liquidity. But they will no longer save you the taxes like they used to.

Also Read: New mutual fund rules were introduced on 1 April 2023. Will you be taxed more? Check details

If not debt mutual funds, then what?

While the removal of tax benefits may have dampened the appeal of debt mutual funds, they still hold potential for growth if the RBI repo rate falls. However, with the unpredictability of RBI's future decisions, it may be wise to hold off on long-term investments in debt mutual funds.

Instead, here are a few alternatives that you can consider:

  • Fixed deposits - Public and private banks offer 4-9% interest on Fixed Deposits (FDs), which mostly depend on the tenure. These deposits are insured up to Rs. 5 lakhs and can be liquidated by paying a penalty of 0.5%. Small finance banks and corporates also offer FDs, often at a higher interest rate.

Also Read: Can the makeover of debt mutual funds be better than FDs in India? 

  • Bonds - RBI offers an interest rate of 8.05% on its seven-year bonds. Bonds with flexible tenure options are also available in stock exchanges, brokers or other primary market sources. These bonds and non-convertible debentures can offer up to 12% interest and tenures of one to twelve years.
  • Post office schemes - Post office deposits have a tenure of one to five years and offer an interest income of 6.8% to 7.5%. Premature withdrawal is not allowed on these deposits in the first six months and is subject to a penalty afterwards. Senior citizens can opt for the five-year saving scheme instead, which offers a higher interest rate of 8.2%.
  • Public Provident Fund - Investing in Public Provident Fund (PPF) can be done via PPF or bank accounts, offering a long-term tenure of 15 years with 7.1% interest, which significantly compounds over time.
  • G-secs and Treasury bills - These are versatile investments with flexible tenures ranging from six months to 40 years. They are redeemable only at maturity, and their interest rates are linked to the market.
  • Mutual funds - You can consider mutual funds, including liquid and overnight funds, target maturity funds, arbitrage funds, and equity saving funds as alternatives to debt funds.

Moreover, High Net Worth Individuals (HNIs) have the option to diversify their portfolio by investing in Alternative Investment Funds and Portfolio Management Schemes with minimum investments starting from Rs. 1 crore and Rs. 50 lakhs, respectively.

Also Read: Debt fund taxation rule has changed - what do expert wealth managers say?

In conclusion, the recent changes in tax laws have impacted the returns on debt mutual funds. However, investors still have several alternative investment options, such as PPF, G-secs, and various mutual funds. It is important to understand the risks and benefits of each investment and to diversify the investment portfolio to achieve the desired financial goals.

Overall, investors should stay informed and make well-informed decisions to maximise their returns and minimise risks.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.


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