For most retail investors in India, mutual funds are related to equity investments. Retail participation in debt mutual funds in India is relatively quite low. As per AMFI data (January 2019), assets under management (AUM) of individual investors in equity oriented schemes is more than double of AUM in debt oriented schemes (including liquid funds). Equity AUM of individual investors is also growing faster on a year on year basis compared to debt mutual fund AUM. The low share of debt mutual funds in retail investor portfolios is primarily due to lack of awareness, but investors should know that debt mutual funds offer solutions for a wide range of investment needs, tenors and risk appetites.
Why you should consider debt mutual funds for your portfolio?
Let us now assume you invested in the same amount (Rs 10 Lakh) in a debt mutual fund 3 years back. Let us further assume that you got an annualized return of 7%. Your investment value after 3 years will be Rs 125,000. If your investment holding period is more than 3 years, you will be allowed to index your cost of purchase based on cost inflation index in the year of redemption and cost inflation index in the year of acquisition (purchase).
- Cost Inflation Index in 2018-19 (year of redemption): 280
- Cost Inflation Index in 2015-16(year of acquisition): 254
- Indexed Cost of purchase = Investment Amount X (Cost Inflation Index in the year of redemption) / (Cost Inflation Index in the year of acquisition) = 10 X 280/254 = 11.02 Lakhs
- Long term capital gains (after indexation) = 12.25 – 11.02 = 1.23 Lakhs
- Long term capital gains tax (@20%) = 1.23 X 20% = Rs 24,530
- Post Tax Income = Rs 2 Lakhs
You can see that the investment in debt funds, your tax obligation for the same income is much less than bank FDs. On a post-tax basis, debt funds are likely to give much superior returns than bank FDs.
In this blog post, we discussed why debt mutual funds should be part of your investment portfolios. Debt funds will help you optimize your asset allocation, diversify risks, add liquidity and get superior post tax returns. There are a large variety of debt funds with different risk / return profiles. Not all debt funds will be suitable for you. You should select debt funds based on your risk appetite and investment tenor. You should consult with a financial advisor before investing in debt funds to understand which funds will be suitable for your investment needs.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.