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Tata Capital > Blog > Wealth Services > With LTCG Benefit Gone, Why One Should Still Invest in Debt Mutual Funds?

Wealth Services

With LTCG Benefit Gone, Why One Should Still Invest in Debt Mutual Funds?

With LTCG Benefit Gone, Why One Should Still Invest in Debt Mutual Funds?

The 2023 financial budget brought about a big change to debt mutual funds. In case you missed it, from April 1, 2023, the government has withdrawn the indexation benefits on calculating long-term capital gains of debt mutual funds. Instead, returns on debt mutual funds will now be taxed as per the individual's income tax slab.

This new tax rule applies to mutual funds with less than 35% funds in equity, as they now will be treated as short-term gains. So, with the LTCG benefits gone, are debt mutual funds still a lucrative investment? What do these changes mean?

Let's get into the details.

What are the effects of taxation changes on debt mutual funds?

With the indexation benefits gone, returns on debt mutual funds will be taxed based on the individual's tax slab, the same as fixed deposits. As a result, financial experts believe FDs to come at par with debt MFs as an asset class.

So, investors looking at long-term investments will be adversely affected since the removal of indexation benefits has also removed the inflation-beating benefits for investors. However, this is unlikely to have any effect on debt MFs as a lucrative investment option in the short term.

With the tax changes, interest rate changes and higher returns will be the only criteria to invest in any of these asset classes.

Benefits of investing in debt mutual funds

Even with indexation benefits no longer applicable, debt MFs have proven to be a profitable investment option. And here's why you should still consider investing-

1. Stable returns

Since debt funds are less dependent on the market, they offer better and more stable returns than fixed deposits. It offers you access to wholesale debt markets and money markets and invests in instruments such as corporate bonds, debentures, and CDs, which are less sensitive to market movements.

2. Wide range of investment options

Debt mutual funds invest in securities across a wide spectrum of risk and maturity. It diversifies across instruments and reduces risks of the investment being concentrated in one basket when compared with FDs. So, you can choose to invest in short-term funds for stable returns and regular income or long-duration funds for higher interest income if you don't mind the risk.

In addition, you also have access to corporate bond funds, liquid funds, and overnight funds if you're looking for a safer investment avenue.

3. Higher liquidity

Unlike other similar investment options like FDs and PPFs that carry a lock-in period or penalties for pre-mature withdrawal, debt MFs are highly liquid. While some mutual funds might impose a small exit load against pre-mature withdrawal, debt MFs are mostly penalty-free.

You can easily withdraw your funds when you need them, typically within a day or two of making the redemption request. And, of course, you can even park a portion of your funds in short-term funds, depending on your financial needs.

4. Flexibility

As with most mutual fund schemes, debt MFs also give you the option to start investing a lump-sum amount if you have surplus funds. Alternatively, you can invest in small amounts regularly through SIPs and enjoy similar, low-risk returns over the investment tenure.

5. When interest rate falls

In case of debt MFs, investors benefit when the interest rates fall as bond prices start rising when they fall. As a result, debt MFs tend to deliver higher than the portfolio yield when compared to FDs where there is no benefit available when interest rates fall.

6. Short term capital gains (STCG) can be set off against short term capital losses (STCL)

In case of debt MFs, STCG can be set off against short term capital losses (STCL) from any other asset (equity, debt, gold, real estate, foreign stocks).

7. Deferral of tax

When compared to bank FDs wherein tax has to be paid every financial year when the bank credits interest to the account; while in case of debt MFs, tax has to be paid only at the time of withdrawal.

In the end

Given their ability to offer high, stable returns, it is safe to believe that debt mutual funds will continue to be an attractive investment option, especially for short-term investors. And if you're looking to take the leap with debt MFs, head over to Tata Capital's Wealth management portal to research and compare various mutual fund schemes and get expert guidance.

Visit our website today.

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