Want to invest your FD proceeds in mutual funds? Here is how to do it

Most individuals can’t think beyond bank deposits when it comes to deploying their savings. However, fixed deposits do not pay much, and the interest is added to the income and taxed as per the Income Tax slab applicable.

This is the main reason why many investors investing in debt mutual funds instead of parking money in bank deposits. Debt mutual funds may offer market linked returns, which could be marginally higher than bank deposits.

If invested with a horizon of more than three years, debt mutual funds may offer better after-tax returns. Investments in debt mutual funds held over three years are taxed at 20 percent with indexation benefit. The indexation helps to bring down the actual taxes to a single-digit in an inflationary scenario.

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If you are investing for less than three years, both bank deposit and debt mutual funds are taxed similarly. Returns or interest would be added to the income and taxes as per the income tax slab applicable to the investor.

If you would like to explore debt mutual funds, here is some help.

Point to note: there are several kinds of Debt mutual funds. You should choose a scheme that matches your investment horizon and risk profile.

Liquid Funds are very low-risk funds. They invest in highly liquid money market instruments. They invest in securities with a residual maturity of upto 91 days. Investors can park money in them for a few days to few months. These funds may offer marginally higher returns than bank deposits.

For eg. Portfolio of Aditya Birla Sun Life Floating Rate ST

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Floater funds are mostly invest in floating rate instruments. These schemes will invest at least 65 per cent of the total asses in floating rate instruments.

For eg. Portfolio of Kotak Floater ST
 

Banking and PSU funds are predominantly invest (80 percent of assets) in debt instruments of banks, public sector undertakings and public financial institutions.

For eg. Portfolio of ICICI Prudential Banking PSU Debt

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Fixed Maturity Plans (FMPs) are a good alternative to fixed deposits for investors in the higher tax bracket. These are closed-ended debt mutual funds with defined maturity. FMPs usually invest in securities which match their tenure and follow buy and hold till maturity strategy. This makes it free from interest rate risk. An FMP may match the yield offered by its portfolio constituents with minute deviations. FMPs also have credit risk, which means that its returns will be hit ..

For eg. Portfolio of Reliance FHF XXXV S16

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Short-Term Funds invest mostly in debt securities with an average maturity of one to three years. These funds perform well when short-term interest rates are high. They are suitable to invest with a horizon of a few years.

For eg. Portfolio of Franklin Templeton Franklin India Low Duration

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Dynamic Bond Funds have an actively-managed portfolio that varies dynamically with the interest rate view of the fund manager. These funds invest across all classes of debt and money market instruments with varying maturities. They are ideal for investors who want to leave the job of taking a call on interest rates to the fund manager.

For eg. Portfolio of IIFL Dynamic Bond

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Income Funds are highly vulnerable to the changes in interest rates. These funds invest in corporate bonds, government bonds and money market instruments with long maturities. They are suitable for investors who are ready to take high risk and have a long-term investment horizon. The right time to invest in these funds is when the interest rates are likely to fall.

For eg. Portfolio of Baroda Pioneer Dynamic Bond

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Mutual fund Strategy: Time to invest in accrual and short-term bond funds

Credit Opportunities Funds are the debt funds which invest in corporate bonds and debentures of credit rating below AAA. The idea is to invest in low-rated securities with strong fundamentals which are expected to see a rating upgrades in the future, benefiting the portfolio and investors. These funds involve high credit risk. A default or a downgrade in a rating of the scheme’s portfolio holdings may hit the returns badly. Their portfolio consists government securities and T-Bills ..

For eg. Portfolio of IDFC Credit Opportunities

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Gilt Funds invest in government securities. They do not have the default risk because the bonds are issued by the government. However, these funds are highly vulnerable to the changes in interest rates and other economic factors. These funds have very high interest rate risk. Only investors with a long-term horizon should consider investing in them.

For eg. Portfolio of HDFC Gilt Short Term

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Debt-oriented Hybrid Funds invest mostly in debt and a small part of the corpus in equity. The equity part of the portfolio would provide extra returns, but the exposure also makes them a little riskier than pure debt schemes. Investors with a horizon of three years or more can consider investing in them.

For eg. Portfolio of Tata Retirement Savings Conservative

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Note: Past performance of fund does not guarantee the future returns.

Mutual Fund Investment are Subjected to Market Risks, Read all Scheme Related Document Carefully.

Disclaimer: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.