Retail investors warm up to debt Mutual Fund

Nov 12 2013, 09:17 IST
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While SIPs are being increasingly used for investment in equity schemes (PTI) While SIPs are being increasingly used for investment in equity schemes (PTI)
SummaryWhile SIPs are being increasingly used for investment in equity schemes

also look at other short duration debt products, like short-term debt schemes of mutual funds.

Even the hike in dividend distribution since June has come as a double whammy for debt investors? Do you think there is a case for a relook given the kind of losses investors have incurred in their portfolio?

The hike in dividend distribution tax has, to a certain extent, reduced the relative attractiveness of mutual fund debt products. Deepening of the secondary debt market is an integral part of development of capital market, and is necessary for economic growth. As return on mutual fund debt schemes are not guaranteed and are also uncertain, it is desirable that they carry suitable tax incentives so as to remain attractive to investors. Quite apart from the losses suffered due to the policy changes, there is a case for revisiting the dividend distribution tax on all debt schemes of mutual funds, to enhance the attractiveness of these products to retail and other investors and thereby deepen debt markets.

Typically, for a salaried individual who keeps idle money in savings account or opens a recurring deposit in a bank, what kind of debt mutual fund product offering should he look at as favourable tax efficient investments options?

Mutual funds offers very attractive debt products, which can be considered by salaried individuals for superior returns with low risk. The products are also tax efficient, in that the applicable tax rate becomes much lower, giving rise to a higher post tax returns. Liquid fund schemes of mutual funds present an excellent opportunity to deploy your surplus money for a short period of time — even overnight — without loosing liquidity. The proceeds of such schemes are invested by the mutual funds in good quality paper having adequate liquidity in the market. These papers usually yield an attractive carry, giving good and tax-efficient returns to investors. There is no exit load and investors can exit as soon as they want. Ultra short-term funds also provide quite similar benefits to investors for short-term deployment/investments. At the prevailing rates, these products do not only generate yields higher than savings product, but also than recurring deposits of comparable maturity.

An investor looking for a low-risk attractive yield longer duration investment, spreading over an year or beyond, can invest in FMPs, where the returns are usually higher than the prevailing returns in guaranteed debt products. Further, investors in FMPs

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