I fall in the highest tax bracket and feel that debt funds are better for me than fixed deposits. I want to invest in debt funds for the long-term through SIPs, and will be happy with 9-10 per cent returns. Is this advisable?
- Umesh B Prabhu
Yes, you are right. The interest earned on bank fixed deposits are added to an individual’s taxable income and charged as per the applicable tax slab.
So an investor like you, who is in the highest tax bracket, will have to shell out 30 per cent of your interest income by way of taxes. On the contrary, if one is invested in a debt fund, then long-term capital gains would be taxed at 11.33 per cent without indexation, or 22.66 per cent with indexation.
So for investors who fall in the highest tax bracket, debt funds would be more tax-friendly than a bank’s fixed deposits, if the investment is for the long-term.
Apart from being one-up on the tax front, debt funds also provide better liquidity than a fixed deposit, which carries a heavy penalty for early exits. However, debt funds are neither risk-free nor assured-return instruments, like bank fixed deposits.
Investing in a debt fund through an SIP is not advisable. Instead, a one-time investment is recommended. Systematic investments are mainly required for equity which is, as an asset class, inherently volatile. SIP helps in combating this volatility through rupee-cost averaging.
Since you want to invest in debt funds for the long-term, you can consider investing in income funds, which have the flexibility to switch between corporate bonds and gilts. Because of this, not only do they benefit from falling interest rates but also gain from shrinking spreads between corporate bonds and gilts.
But bear in mind that no debt fund category has been able to give returns in the 9-10 per cent range in the past five years and that the income funds category has given an annualised return of 5.33 per cent only in the last five years.
Can you suggest some good liquid or debt funds in which I can invest about Rs 12 lakh and then systematically transfer Rs 1 lakh each month into some equity scheme? I am very conservative and would not like to take too much of a risk.
- R Balasubramanian
Liquid funds invest in short maturity instruments like commercial papers or bonds issued by companies. The market value of these instruments is affected by changes in yields on short-tenure government securities.
As liquid funds are at the shortest end of the maturity spectrum, they are affected the least by interest rate fluctuations. Thus, they are considered reasonably safe.
You can opt for well-rated liquid funds like Canara Robeco Liquid, HDFC Cash Management Savings, LICMF Liquid and Templeton India MMA.
I had invested Rs 3 lakh in JM Basic. The fund is facing a huge loss now. Can you advise what can be done now?
- Sharad Bailur
The fund is an aggressive pick. It has witnessed a whopping 76 per cent loss in the market meltdown last year, which is why you are suffering such a huge loss. Its portfolio is dominated by small-cap stocks. This is what holds it back.
It seems unlikely that the fund will take part in the recovery. It would be better that you reconcile with the loss from this fund.
Is there any ELSS with an expense ratio of less than 1.5 per cent, and which is also reasonably? - Kartik Vaddadi
All mutual funds in India have to be registered with the market regulator – the Securities and Exchange Board of India (Sebi). There are stringent regulations that promoters have to fulfill before they can set up a mutual fund. SEBI strictly governs the functioning of the fund industry. The holdings of mutual funds are kept with the custodian who is responsible for their safe keeping. So if you invest in a mutual fund registered with Sebi, you can be sure that it is not going to run away with your money.
Currently, there are three ELSS funds that have an expense ratio of less than 1.5 per cent. LICMF Tax Plan is a two-star rated fund, Tata Tax Saving is three-star rated and Edelweiss ELSS is a new fund which was launched in December 2008.
From the performance point of view, there are better tax saving funds in the market with proven track records. But they do not fit in your 1.5 per cent expense ratio limit. It is always better to compromise on the expense ratio rather than compromising on good funds. Also, the maximum expense ratio a fund can charge is 2.5 per cent, which is not too high than your expectation of 1.5 per cent.
In case you compromise on a good fund for a lower expense ratio, you may end up losing much higher than what you would have lost had you paid an additional 1 per cent in an expense ratio for a good fund.
I'm planning to invest in a liquid fund and I have short-listed HDFC Cash Management Savings, JM Money Manager Super and Fortis Money Plus Regular. While I like JM Money Manager Super for its returns, I am worried about the risk. On the other hand, Fortis Money Plus seems to be performing well of late. Which fund would be better? I plan to invest a sizeable sum every month for the next two years for a lumpsum payment that I have to make after two years. - Anand V
Out of the three choices you have made, only HDFC Cash Management Savings is a liquid fund, while the remaining two are liquid-plus funds. The portfolios of liquid funds have a lesser maturity profile than that of liquid-plus funds. Hence, liquid funds are relatively safer as they are less sensitive to interest rate movements.
Considering your time-frame of two years, we would suggest that you invest in an income fund. For a debt investment with a time horizon of more than one year, income funds form a better choice than other categories as they invest in both gilts and corporate bonds. You can choose well-rated income funds with a proven track record, such as Kotak Flexi Debt, Birla Sun Life Dynamic Bond and Canara Robeco Income.
Value Research
