A rising interest rate regime sees retail investors moving into debt instruments, especially fixed deposits. And the recent rise in interest rates makes fixed deposits quite attractive.
The country’s largest bank, State Bank of India, is offering interest rates as high as 9.25 per cent for 555 days. Smaller banks like Lakshmi Vilas Bank and Karur Vysya Bank are offering 10.10 per cent and 10 per cent, respectively, for one-year deposits.
However, another option that investors can consider is debt funds. And, it is primarily because the tax burden could be lesser. Returns from fixed deposits will be added to your income and taxed, according to the slab.
On the other hand, returns from debt funds will be taxed at 10 per cent without indexation and 20 per cent with indexation for investments over one year. For investments less than one year, the capital gains is added to the income and taxed, according to the slab.
And there is a large variety available of different tenures. For investors interested in parking funds for the short term, there are liquid, ultra short term and short-term bond funds. For the medium-term investor, there are income and bond funds. Long-term investors can look at long-term gilt funds.
Financial planners believe this could be a good time to enter debt funds up to the tenure of one year. “At best, look at fixed maturity plans of 15-18 months that one can look at,” said Hemant Rustagi, CEO, WiseInvest, Advisors. Returns on these schemes for these periods are to the tune of 9.5-9.8 per cent. But the advantage here is double indexation (as per current taxation laws).
Even FMPs of lower tenures can be considered such as, three months or six months. The returns are to the tune of 9.5-9.6 per cent annually.
If you are not sure for the time horizon, one can look at ultra short-term funds, which are for three-six months and are offering 7.2 per cent annually. Even liquid fund of three months are offering similar returns. Dhruv Mehta, an independent financial advisor favours these as they earn a higher interest rate as compared to your regular savings account return. “You can consider these for an investment period of up to a month,” says Mehta.
The main reason that financial experts said that schemes of higher horizons should not be considered now is because there are expectations that more rate rise could take place in the near future. According to Abheek Barua, chief economist, HDFC Bank, “Interest rates will move upwards until April-May and flatten out thereafter.” Against this backdrop, funds investing in short-term instruments should work best.
Other options like balance funds and monthly income plans can be looked at. But they have an equity element that can make them riskier in nature. Investors who have a minimum investment horizon of three years and would like to take advantage of the equity component in the fund can consider these.
