Hello Readers!

On 23^rd April 2020, Franklin Templeton Mutual Fund announced that they are winding six of debt Fund schemes, due to the increased redemption pressure and its inability to sell low-rated bonds in the market.

After this incident, some investors started taking debt funds as riskier and decided to turn back to a safe option to invest their money that is ‘safe-haven’ bank Fixed Deposits (FD).

Well, as per the financial experts, even after the fiasco of Franklin Debt Mutual funds, Debt fund schemes are a better option than Fixed Deposits to invest your money.

Let us know about some good points about Debt fund schemes that make it a better investment option than FDs.

DEFAULT RISK 

Fixed deposits in Bank, are taken as a safe haven, as it provides the security of compensation of up to Rs 5 Lakh per deposit from Deposit Insurance and Credit Guarantee Corporation (DICGC), in case of defaults.

Debt funds invest in government debt papers, bonds, and companies. Some debt funds that are associated with credit risk, invest in lower-rated bonds, in order to earn high returns. Most categories of debt funds invest largely in top-quality bonds. However, some in their eagerness to be on top of the return charts, ultimately, pay the price.

However still after this, the better-suggested option by Financial experts is considered as DEBT FUNDS. The main reason behind the negligence of FD’s is the failure of the management system in the banking sector. History is full of the failure stories of the banking sector. If we look a year back, you must remember that depositors of PMC and Yes Bank faced hardships with restrictions being imposed on fund withdrawals. However, whenever a bank fails in their management, RBI to recover it merge it with bigger ones. But in case if you are choosing FD’s over Debt funds, I must say, you shouldn’t deny the fact that bank depositors always have to pay for the financial mismanagement of banks.

LIQUIDITY RESTRICTION IN FD’s

You must be aware of the fact that when you invest in FD’s, your invested money is locked until its maturity. You cannot withdraw it before its maturity period overs. In case if you withdraw your money from FD’s before the maturity period overs, then you have to break you FD, also you will have to pay the penalty, of early withdrawal.

Debt funds are short term investments, and contain a good amount of liquidity, investors can withdraw their money whenever they require it, also they wouldn’t be charged any kind of penalty.

However, in case of mass redemption requests from debt funds that invest in low-rated bonds, during a down market, there can be liquidity issues. The same situation occurred in the Debt Fund Scheme of Franklin Templeton Mutual Fund. While the Debt funds that invested in top quality bonds, instead of low-rated bonds, didn’t face any liquidity issues.

TAX EFFICIENCY

Debt funds do not provide fixed returns like in the case of FDs. Return from debt funds are in correspondence to interest rate change in the economy, but also, they are more tax-efficient than FDs, especially when they are held for long three years.

In FD’s, the returns are taxed annually at the marginal rate (31.2 percent for the top income bracket). While capital gains for debt funds are taxed at a lower rate of 20 percent with the benefit of indexation, thus making the post-tax benefits from debt funds superior to that from FD’s.

INVESTMENT STRATEGY

If you are looking towards investing in Debt funds but is afraid because of the fiasco of Franklin Debt Funds. I would suggest going investing in other low-risk categories of debt funds, like Short-term Debt Fund, ultra-short-term Fund, and others. They carry lower interest rate risk due to investment in debt securities that mature within a year.  I suggest while choosing funds, don’t chase returns and focus instead on safety aspects.

The mistakes in the investment strategy of some debt players and their failure stories don’t declare debt funds a bad proposition. It still stands out as a better option over bank FDs on a post-tax basis.

For any kind of investment query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).