Debt Funds Vs FD this is a word that people are increasingly thinking about. The fixed deposits aren’t giving investors a decent return nowadays. The rates are going down in small savings schemes. So people are compelled to find out other avenues of higher returns. Here I will discuss what the debt mutual funds will offer to beat returns of FD.
There are two ways to make money out of debt funds. When the interest rates go down the bond values go up. The higher the duration the higher the bond values.
1) In 2017 short term debt funds are good bets.
2) Dont expect duration funds to do well in 2017.
3) Corporate bond funds are good bets this year.
How To choose Debt Funds Vs FD?
When we expect interest rates to come down through out the year we choose a long duration debt funds. That happened in 2015-2016. But now the interest rates have already come down. There are now limited scope for interest rates to go down further. So its not prudent now to invest in very long duration debt funds.
In 2017 investors should concentrate on short term bonds or short term government papers or short term bank papers. Apart from that the corporate bond funds are also likely to give good returns.
3 Debt Mutual Funds That Are Likely To Beat Fixed Deposit Returns In 2017:
1) ICICI Prudential Short Term Fund
2) ICICI Prudential Regular Savings Fund
3) ICICI Prudential Corporate Bond Fund
These funds will invest in AA rated corporates OR debentures so they get accrual income, means the income is accrues every quarter or every six months. One can expect 7%-8% returns a year safely from these funds
Tax Aspect of Debt Mutual Funds
If one stays invested in these funds for 3 years they also gets tax benefits of indexation. So the tax payable is very less as compared to fixed deposits. So Debt Funds Vs FD are clearly a winner from the tax adjusted point of view.
Risk Involved In Debt Funds:
Sometimes debt funds NAV come down temporarily if rating agencies downgrade certain corporates. So if an investors comes out at those times he may suffer some financial loss. A credit default also can bring down the debt funds price rapidly. To minimise the risks mutual funds invest in large basket of securities. So they invest in 40-50 companies and if any downgrade happens in any of them impact is not much as the risk is diversified.
Investors should look forward to invest in short term Debt Funds Vs FD for a steady 7%-8% almost tax free return in 2017. Its a 3 years investment and you can park at least 50% of your fixed deposit investments in debt mutual funds.