Does it make sense to invest in debt funds anymore?
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Does it make sense to invest in debt funds anymore?
Debt funds are now taxed like bank deposits. They don’t enjoy the benefits of long term capital gains tax anymore.
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Advice for small investors
Some mutual funds are asking their clients to stick to bank deposits as debt funds don’t enjoy any tax advantages anymore.
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Struggling to beat deposits
Debt funds are supposed to offer better after-tax returns. However, these schemes had a subdued year in 2022. They struggled to beat bank deposits last year.
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A better year
Debt schemes fared better in 2023. Long duration and gilt with 10 years constant duration offered over 8% in one year. Target Maturity, floater, gilt, credit risk, medium to long duration schemes offered over 7%.
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Very close to bank deposits
Even the categories that failed to match or beat bank deposit rates offered 6.5% in one year. SBI offered 6.80% for a one year fixed deposit.
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Play it safe
Mutual fund advisors say the only benefit these schemes offer is the avoiding the inconvenience of paying TDS on interest. But they say small investors need not bother about it so much.
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Next year could be better
Advisors say debt schemes may offer better returns next year if the RBI starts cutting interest rates. Because of the inverse relationship between bond yields and prices, debt funds gain when interest rates rise.
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