Many investors, it seems, are looking alternatives to their bank deposits. According to some mutual fund advisors and financial planners, many individuals are asking them where should they invest their FD maturity proceeds.
“There are many investors who align their fixed deposit term with the financial year. Those whose FDs are maturing soon and who do not need that money now are asking where should they invest the proceeds,” says Ankita Tanna Narsey
Most individuals can’t think beyond bank deposits when it comes to deploying their savings. However, fixed deposits do not pay much and the interest is added to the income and taxed as per the Income Tax slab applicable to the customer.
This is the main reason why many financial advisors advocate investing in debt mutual funds instead of parking money in bank deposits. Debt mutual funds may offer market linked returns, which could be marginally higher than bank deposits.
If invested with a horizon of more than three years, debt mutual funds may offer better after-tax returns. Investments in debt mutual funds held over three years are taxed at 20 per cent with indexation benefit. The indexation helps to bring down the actual taxes to a single-digit in an inflationary scenario.
If you are investing for less than three years, both bank deposit and debt mutual funds are taxed similarly. Returns or interest would be added to the income and taxes as per the income tax slab applicable to investor.
Ultra Short-Term Funds are low risk funds. These funds invest mostly in very short-term debt securities and a small portion in longer-term debt securities. But, these are not as safe as liquid funds. Investors can park their money for a few months to a year in them. The category has offered 6.90 per cent in the last one year.
Fixed Maturity Plans (FMPs) are a good alternative to fixed deposits for investors in the higher tax bracket. These are closed-ended debt mutual funds with defined maturity. FMPs usually invest in securities which match their tenure and follow buy and hold till maturity strategy. This makes it free from interest rate risk. An FMP may match the yield offered by its portfolio constituents with minute deviations. FMPs also have credit risk, which means that it’s returns will be hit if any security held in its portfolio face rating downgrade.
Short-Term Funds invest mostly in debt securities with an average maturity of one to three years. These funds perform well when short term interest rates are high. They are suitable to invest with a horizon of a few years. The category has returned 6.41 per cent in the past year.
Dynamic Bond Funds have an actively-managed portfolio that varies dynamically with the interest rate view of the fund manager. These funds invest across all classes of debt and money market instruments with varying maturities. They are ideal for investors who want to leave the job of taking a call on interest rates to the fund manager. The category has returned 4.25 per cent in the last year.
Income Funds are highly vulnerable to the changes in interest rates. These funds invest in corporate bonds, government bonds and money market instruments with long maturities. They are suitable for investors who are ready to take high risk and have a long term investment horizon. The right time to invest in these funds is when the interest rates are likely to fall. The category average returns were 5.13 per cent in the past year.
Credit Opportunities Funds are the debt funds which invest in corporate bonds and debentures of credit rating below AAA. The idea is to invest in low-rated securities with strong fundamentals which are expected to see a rating upgrades in the future, benefiting the portfolio and investors. These funds involve high credit risk. A default or a downgrade in rating of the scheme’s portfolio holdings may hit the returns badly. Their portfolio consists government securities and T-Bills as well but in small percentage to provide liquidity in case of heavy redemptions. These schemes are not recommended to meet your non-negotiable goals.
Gilt Funds invest in government securities. They do not have the default risk because the bonds are issued by the government. However, these funds are highly vulnerable to the changes in interest rates and other economic factors. These funds have very high interest rate risk. Only investors with a long-term horizon should consider investing in them. Gilt medium and long term category has returned 2.08 per cent in the past year.
Debt-oriented Hybrid Funds invest mostly in debt and a small part of the corpus in equity. The equity part of the portfolio would provide extra returns, but the exposure also makes them a little riskier than pure debt schemes. Investors with a horizon of three years or more can consider investing in them.