Debt Funds Vs Fixed Deposits | CA Sandeep Kumar

Which debt fund is for you?

Equity markets have faced turmoil in the past two months, but fixed-income investors have reasons to smile.

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About CA Sandeep Kumar 👨‍💼 CA, CS, and MBA, Sandeep Kumar is an entrepreneur and a passionate teacher. With vast expertise in finance, he delivers creative and insightful content that helps individuals and businesses navigate the complexities of finance and tax planning.

Here are the reasons

LIQUIDITY : Debt funds are highly liquid and the money reaches your bank account within a day. When you break a fixed deposit prematurely, the entire investment is withdrawn. In debt funds, investors can make partial withdrawals without breaking the investment.

Flexibility
Withdrawals are equally convenient, as they can be made at any time without restrictions. Additionally, investors can switch seamlessly to other funds within the same mutual fund house without needing to withdraw their investments. This adaptability makes open-ended debt funds an attractive option for diverse financial needs.

Tax Planning for Debt Funds
With the removal of indexation benefits, gains from debt funds are now added to the investor's income and taxed as per their applicable slab rate. However, a significant advantage is that these gains can be adjusted against losses from other investments, helping optimize tax liability.
In contrast, interest earned on bonds and fixed deposits cannot be offset against losses, making debt funds a more flexible option for tax planning in certain scenarios.

Deferred Tax Advantage in Debt Funds
Interest earned from bonds and fixed deposits is fully taxable in the year it accrues, regardless of whether it is withdrawn. In contrast, gains from debt funds are taxed only upon withdrawal.
This allows investors to defer their tax liability by holding the investment for a longer period. Additionally, by strategically timing withdrawals, investors can minimize their overall tax impact, making debt funds a more tax-efficient option for long-term planning.

Diversification in Debt Funds
Similar to equity funds, debt funds invest in a diversified portfolio of securities, including corporate bonds, government securities (gilts), certificates of deposit, and PSU bonds.
This diversification helps spread the risk of default across multiple instruments, reducing the impact of any single issuer's financial troubles.

Wide Choice in Debt Funds
Debt funds offer a variety of categories, each tailored to meet different investor needs. Whether you're looking to park your money for a few weeks, a few months, or several years, there is a scheme designed to suit your specific investment horizon.
This wide range of options makes debt funds a versatile choice for achieving short-term liquidity or long-term financial goals.

Switch to Short-Term Debt Funds for Stable Returns
• Consider shifting to short-term debt funds for stable and consistent returns.
• Stagger the transition to take advantage of the tax-free long-term capital gains limit of ₹1.25 lakh per financial year.
• The short-term debt fund category has delivered an average return of 8.36% in the past year, making it an attractive option for steady growth.

Smart Investment Strategies | Short-Term & Dynamic Bond Funds
Looking to safeguard your investments or maximize returns? Here’s how you can plan effectively:
✔ Short-Term Debt Funds:
• Ideal for short-term goals and stable returns.
• Offer safety, easy withdrawals, and protection from market volatility.
• Funds hold short-maturity bonds (6-18 months), making them less sensitive to interest rate changes.

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