Debt funds offer a number of benefits for investors compared to bank Fixed Deposits.
- High Degree of Liquidity – Unlike bank FDs, you don’t have to break your investments as a whole and pay penalty. In case you require money for an emergency, you can withdraw only the required amount and let the remaining stay invested.
- Better Returns after Tax –Bank FDs are taxed at your current tax slab. Also tax is applicable in the year of interest accrual. Tax on debt funds is incurred only when you withdraw your money and if you hold for more than 3 years. Long term capital gains with indexation applies, reducing the tax outflow to negligible amounts.
- Comparable credit risk –Bank FDs are typically AAA rated (High Degree of Safety - Lowest Credit Risk). With careful selection, you can invest in debt funds which offer comparable degree of safety. For example, Scripbox recommended portfolio of debt funds have most of their investments in high safety instruments (Sovereign, AAA, A1).
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